CORPORATIONS    AND    THE    STATE 


CORPORATIONS 
AND  THE  STATE 


BY 

THEODORE   E.    BURTON 

AUTHOR   OF    "  FINANCIAL   CRISES    AND    PERIODS    OF    INDUSTRIAL 
AND   COMMERCIAL   DEPRESSION  " 


NEW    YORK    AND    LONDON 
D.    APPLETON    AND    COMPANY 

1911 


COPYRIGHT,  1911,  BY 
D.  APPLETON  AND  COMPANY 


Published  October,  1911 


Printed  in  the  United  States  of  America 


THIS  VOLUME  IS  RESPECTFULLY  DEDICATED 
TO  THE  INSTRUCTORS  AND  STUDENTS  OF  THE 
UNIVERSITY  OF  PENNSYLVANIA  AND  TO  NUMER- 
OUS CITIZENS  OF  PHILADELPHIA,  WHO  GAVE 
GENEROUS  ATTENDANCE  AND  RECOGNITION  TO 
THE  LECTURES  UPON  WHICH  IT  IS  BASED 


2208276 


PREFACE 

THE  first  six  chapters  of  this  volume  contain  the  sub- 
stance of  a  series  of  lectures  delivered  on  the  George 
Leib  Harrison  Foundation  at  the  University  of  Penn- 
sylvania in  the  months  of  November  and  December, 
1910.  The  final  chapter  has  been  added  since  the  de- 
cisions in  the  Standard  Oil  and  American  Tobacco 
Trust  Cases  were  rendered  by  the  Supreme  Court  of 
the  United  States,  and  aims  to  give  an  interpretation 
of  these  decisions  and  to  forecast  their  probable  effect 
upon  the  problem  of  regulating  corporations  in  the 
future. 

The  cordial  reception  accorded  these  lectures  by  the 
audiences  which  attended  them  was  followed  by  a  re- 
quest that  they  be  published  in  book  form.  In  com- 
plying with  this  request  it  has  seemed  best  to  preserve 
as  far  as  possible  the  style  in  which  they  were  given. 
They  were  delivered  for  the  most  part  extemporane- 
ously. Some  revision  has  been  made  and  expressions 
in  anticipation  of  the  decisions  under  the  Sherman 
Antitrust  Law  have  been  omitted,  but  otherwise  the 
first  six  chapters  do  not  materially  vary  from  the  lec- 
tures as  they  were  delivered. 

The  fourth  chapter,  on  Banking  Corporations,  was 
included  in  the  original  plan  for  the  lectures.  This 
chapter  is  largely  devoted  to  discussion  of  our  mone- 

vii 


PREFACE 

tary  and  banking  problems,  and  is  accordingly  not  in 
entire  harmony  with  the  rest  of  the  book,  but  in  view 
of  the  prominence  of  this  subject  at  the  present  time 
it  has  been  included. 

THEODORE  E.  BURTON. 

WASHINGTON,  D.  C., 
August  1,  1911. 


viii 


CONTENTS 


CHAPTER   I 

ORIGIN  AND  DEVELOPMENT  OF  PRIVATE  CORPORATIONS 

Purpose  of  lectures,  1 ;  Characteristics  of  a  corporation,  1-2 ; 
Exaggeration  of  artificial  personality,  2 ;  The  corpora- 
tion, a  form  of  association,  2-3 ;  Increase  of  population, 
a  sign  of  progress,  3-4 ;  China  and  India  are  exceptions, 
4;  Association,  a  universal  phenomenon,  4;  Carlyle's 
definition  of  society,  4-5 ;  Great  achievements  made  pos- 
sible by  association,  5 ;  First  forms  of  association,  relig- 
ious or  governmental,  5;  Aristotle's  explanation  of  the 
origin  of  the  state,  5-6 ;  Man's  desire  for  associated  ac- 
tion, 6 ;  Three  stages  in  the  development  of  corpora- 
tions, 6-7;  The  first  characterized  by  participation  of 
the  state  in  large  enterprises,  7 ;  Provisions  for  obtain- 
ing food  at  Rome  and  Athens,  7-8;  Some  monopolies 
still  conducted  by  the  state,  8-9 ;  The  second  stage  char- 
acterized by  partnership  between  state  and  individuals, 
9 ;  East  India  Company's  extensive  privileges,  9-10 ; 
Reasons  for  monopoly  grants,  10-12 ;  Smith's  and  Mc- 
Culloch's  views  of  the  joint-stock  company,  12-13 ;  Rea- 
sons for  the  absence  of  joint-stock  companies,  13-14 ; 
Introduction  of  labor-saving  machinery  leads  to  era  of 
competition,  14 ;  Improved  means  of  transportation  also 
a  factor,  15 ;  Other  factors  are  growth  of  popular  gov- 
ernment and  increase  of  capital,  15-16 ;  Commercial  and 
industrial  associations  of  Tyre  and  Greece,  16-17 ;  Roman 
ix 


CONTENTS 

Collegia,  origin  and  functions,  17-19 ;  Origin  and  signifi- 
cance of  the  mediaeval  guilds,  19-20  ;  Factors  causing  era 
of  competition  to  be  superseded  by  combination,  20 ; 
Forms  of  combination :  agreements,  pools,  trusts  and 
holding  companies,  21 ;  Security  of  state  against  cor- 
porations, 22-23 ;  Greater  permanence  of  political  insti- 
tutions, 23-24. 


CHAPTER   II 

NATURE  OF  COMBINATIONS  IN  THE  UNITED  STATES 
AND  ABROAD 

Tendency  toward  combination  everywhere  manifest,  25 ; 
Causes  of  combinations  of  two  kinds,  25-26 ;  Economies 
of  production  and  distribution,  one  cause,  26-27 ;  Other 
advantages  of  combination,  27 ;  The  desire  to  limit  com- 
petition and  control  prices,  most  potent  cause,  28 ;  Evils 
of  combination:  overcapitalization,  stock -jobbing,  etc., 
28-29 ;  Combinations  not  prominent  in  agriculture,  bank- 
ing or  trade,  29-31 ;  Our  policy  toward  railways  has  been 
faulty,  32 ;  Three  stages  in  the  development  of  transpor- 
tation, 32-34 ;  Peculiar  nature  of  railway  business,  34-35 ; 
Unwise  legislation  responsible  for  many  evils  of  rail- 
ways, 35 ;  Gladstone's  views  on  railway  competition,  35- 
36 ;  The  movement  toward  combination  in  foreign  coun- 
tries, 37 ;  Forms  of  German  combinations,  37-38 ;  The 
cartel  is  the  highest  type  of  combination,  38 ;  Operations 
of  a  cartel,  39 ;  Comparison  between  cartel  and  trust, 
39-40 ;  Movements  toward  combination  not  so  marked  in 
France,  41-42 ;  British  combinations  more  like  our  own, 
42-43 ;  Influence  of  particular  conditions  on  the  form  of 
combination,  43 ;  Strict  regulations  in  Germany,  44-45 ; 
English  corporation  laws  are  less  strict,  45-46 ;  Features 
of  French  corporation  laws,  46  ;  Laxity  of  laws  in  United 
States,  46-47 ;  Disposition  of  people  will  determine  future 
of  combinations,  47-48. 


CONTENTS 
CHAPTER   III 

THE  REGULATION  OP  CORPORATIONS 

Prominence  of  corporations  and  necessity  for  regulation,  49 ; 
An  English  example  of  the  regulation  of  a  gas  company, 
50 ;  Street-car  regulations  in  the  city  of  Cleveland,  51 ; 
Conflict  of  state  and  federal  government,  an  obstacle  to 
regulation,  51-52 ;  Competition  between  states  in  secur- 
ing incorporations,  52 ;  State  laws  relating  to  the  man- 
ner of  incorporation,  52-54 ;  State  regulations  regarding 
stock  subscription,  54-55 ;  Different  laws  concerning 
capitalization,  55-56 ;  Regulations  regarding  subsequent 
stock  issues,  56-57 ;  The  laws  of  different  states  regard- 
ing payment  of  dividends,  57;  Regulations  regarding 
powers  granted  to  corporations,  57-58;  Regulations  re- 
garding publicity,  58-59 ;  Reasons  for  and  against  pub- 
licity, 59-61 ;  Recommendations  of  industrial  commission 
regarding  publicity,  61-62 ;  Need  of  higher  standards  of 
business  morality,  62-63;  Failure  of  state  control  and 
necessity  for  federal  regulation,  63 ;  Futility  of  confer- 
ring power  to  regulate  interstate  commerce  upon  states, 
63-64  ;  Three  plans  of  federal  control  proposed,  64  ;  Fed- 
eral control  does  not  mean  eff acement  of  state  lines,  65 ; 
Federal  licensing  versus  federal  incorporation,  66-67; 
National  incorporation  of  railways  the  first  step,  67-69 ; 
Important  provisions  of  the  administration  bill  for  vol- 
untary federal  incorporation,  69-71. 


CHAPTER   IV 

BANKING  CORPORATIONS— STATE  AND  FEDERAL— OUR 
MONETARY  SYSTEM 

Strictness  of  banking  regulations  especially  necessary,  72 ; 

Two  periods  in  history  of  our  banks,  72-73 ;  Laxity  and 

favoritism  are  characteristics  of  the  first  period,  73-74 ; 

Failure  to  regulate  stock  subscriptions  and  note  issues, 

xi 


.      CONTENTS 

74;  New  York  safety-fund  system,  reasons  for  failure, 
75 ;  Notes  secured  by  bonds,  a  second  plan,  75-76 ;  Diffi- 
culty of  the  redemption  of  notes,  76 ;  Other  methods  of 
regulating  note  issues,  76-77 ;  Danger  of  counterfeits, 
77;  Suffolk  banking  system,  77-78;  National  Bank  Act 
of  1863  provided  stricter  regulations,  78-79 ;  Importance 
of  federal  inspection  of  national  banks,  80 ;  Arguments 
in  support  of  constitutionality  of  National  Banking  Act, 
80 ;  Note  issues  of  national  banks  secured  by  bonds,  81 ; 
The  greenbacks  of  the  Civil  War,  82-83 ;  Other  forms  of 
currency,  83;  The  so-called  Crime  of  '73,  83-84;  The 
Bland-Allison  and  Silver  Purchase  Acts,  84 ;  Lack  of 
elasticity  in  all  forms-of  currency  except  gold,  85;  Note 
issues  of  the  Bank  of  England,  characterized  by  inelas- 
ticity, 85-87 ;  Note  issues  of  the  Bank  of  France  and  the 
Bank  of  Germany,  87-88 ;  Connection  of  government  with 
management  of  foreign  banks,  88 ;  Difference  between 
European  banks  and  ours  as  regards  branches,  88-89 ; 
Comparison  of  capitalization  and  deposits  of  foreign  in- 
stitutions, 89-90 ;  The  control  exercised  over  the  rate  of 
interest,  90-91 ;  The  regulation  of  reserves  more  rigid  in 
U.  S. ,  91-92 ;  Payment  of  interest  on  reserves,  not  a 
sound  policy,  92-93;  Organization  and  work  of  the  Na- 
tional Monetary  Commission,  94-95 ;  Difficulty  of  secur- 
ing wise  financial  legislation,  95 ;  Issue  of  paper  money 
by  government,  unsound,  95-96 ;  Assets  afford  better 
basis  for  note  issues,  96;  Requirements  of  a  perfect 
currency  system,  97. 


CHAPTER  V 

CORPORATIONS  AND  THE  PUBLIC  WELFARE 

Extent  of  corporate  activities,  98-99 ;  Amount  of  property 
owned  by  corporations,  99-100 ;  Rejection  of  laissez-faire 
doctrine  of  classical  school,  100 ;  Improvement  in  condi- 
tions resulting  from  adoption  of  labor  laws  and  factory 
acts,  100-101;  Laws  regulating  exorbitant  charges  up- 
xii 


CONTENTS 

held  by  Munn  vs.  Illinois,-  101 ;  A  similar  rule  laid  down 
by  Lord  Hale,  102-103 ;  Regulation  of  prices  by  the  state 
may  become  necessary,  103-104;  Extent  of  movement 
toward  combination,  104 ;  Persistence  of  competition, 
105-106 ;  Greater  harmony  of  interest  manifest  at  the 
present  time,  106-107 ;  Elimination  of  competition  not  in 
all  cases  beneficial,  107 ;  Influence  of  rebates  on  growth 
of  corporations,  108;  Effect  of  tariff  exaggerated,  108; 
Control  of  raw  products,  a  potent  means  to  monopoly, 
108-109 ;  Necessity  of  conserving  natural  resources,  109- 
110;  Unfair  practices  employed  by  corporations,  110; 
The  tendency  toward  state  socialism,  111 ;  Municipal  or 
state  control  of  public  monopolies,  no  argument  for  so- 
cialism, 111-112 ;  Influence  of  corporations  upon  govern- 
ment, exaggerated,  112-113 ;  Publication  of  campaign 
expenses,  a  good  reform,  113 ;  Danger  of  bribery  grow- 
ing less,  113 ;  Personal  affiliation  with  corporate  mana- 
gers may  influence  legislators,  113-114 ;  Motives  for 
favoring  corporations,  114-115 ;  Influence  of  corporations 
upon  the  laborer,  115-116 ;  Influence  of  corporations  upon 
the  investor,  116-117 ;  Influence  of  corporations  upon  the 
independent  producer,  117-118 ;  Influence  of  corporations 
upon  the  consumer  and  producer  of  raw  materials,  118 ; 
The  holding  company,  an  unnatural  and  harmful  form  of 
combination,  119-120 ;  The  Good  Oil  Company,  a  typical 
illustration,  121 ;  The  true  conception  of  a  corporation 
expressed  by  Judge  Roane,  122-123. 


CHAPTER  VI 

ADVISABLE  REGULATIONS  OF  CORPORATIONS 

Four  methods  of  dealing  with  corporations,  124 ;  Danger  of 
political  groups,  one  objection  to  government  owner- 
ship, 124-126;  Other  objections  are  less  efficient  man- 
agement and  loss  of  incentive,  126-127;  Regulation  in 
the  interest  of  the  public,  the  proper  method,  127-128; 
xiii 


CONTENTS 

Mistake  of  attacking  form  of  combination,  128 ;  Punish- 
ment of  dishonest  practices  neglected,  128-129;  The 
common-law  doctrine  of  restraint  of  trade,  129-130 ;  The 
Sherman  Antitrust  law,  its  provisions,  130-132 ;  Pre- 
vention of  monopoly  of  utmost  importance,  132 ;  Salu- 
tary and  unsalutary  regulations  to  this  end,  132-133; 
Necessity  for  complete  elimination  of  railway  rebates 
and  preferences,  134-135 ;  Professor  Clark's  three  regu- 
lations to  prevent  unfair  practices,  135-137 ;  Publicity,  a 
most  needed  regulation,  137-138 ;  Extent  to  which  the 
public  is  fleeced  by  fraudulent  concerns,  138-140 ;  Strict- 
est regulation  of  stock  subscriptions,  capitalization,  and 
dividends  required,  140-141 ;  Restriction  of  activities  of 
corporations  to  definite  fields,  141-142 ;  Penal  statutes 
should  be  definite  and  strictly  enforced,  142-143 ;  Objec- 
tions to  the  plan  of  controlling  prices,  144-145 ;  Limita- 
tion of  profits  more  desirable,  145 ;  Necessity  for  foster- 
ing incentive  in  such  a  case,  145 ;  Revision  of  patent 
laws  advisable,  147-148;  Helpful  regulations  will  pro- 
mote public  welfare,  148-149 ;  Failure  of  attempts  to 
secure  uniform  state  corporation  laws,  149-150  ;  National 
incorporation  for  concerns  doing  an  interstate  business, 
150-151 ;  Advantages  of  voluntary  plan,  151-152 ;  Presi- 
dent Taft  thinks  bad  trusts  will  incorporate  under  it, 
152;  All  corporations  will  not  be  driven  under  federal 
control,  153 ;  The  importance  of  the  relation  of  corpora- 
tions to  the  state,  153-154. 


CHAPTER  VII 

THE  DECISIONS  OP  THE  SUPREME  COURT  IN  THE  STANDARD 
OIL  AND  AMERICAN  TOBACCO  TRUST  CASES 

Attention  attracted  by  the  decisions  in  the  trust  cases,  155 ; 

Dissolution  of  the  two  combinations  ordered,  155-156 ; 

Novel  plan  adopted  for  the  reorganization  of  the  Tobacco 

Company,  156 ;  Wrongful  intent  made  the  basis  for  the 

xiv 


CONTENTS 

illegality  of  both  trusts,  156-159;  Significance  of  the 
new  interpretation  of  the  law,  159-160 ;  Chief  Justice 
White's  definition  of  "Restraint  of  Trade,"  160;  Appli- 
cation of  the  rule  of  reason,  160-161 ;  The  question 
whether  "unreasonable"  has  been  read  into  the  law, 
161 ;  The  danger  of  such  insertion  pointed  out  by  the 
Judiciary  Committee  and  by  President  Taft,  161-162; 
The  use  of  the  word  "undue"  in  these  decisions,  163; 
The  opinion  of  Justice  Peckham  in  the  Trans-Missouri 
Freight  case,  163-164 ;  Opinion  of  Judge  Lacombe  in  the 
Tobacco  case  in  the  Circuit  Court,  164 ;  View  of  Justice 
Day  in  the  Chesapeake  and  Ohio  Fuel  case,  164-165 ;  Jus- 
tice Harlan's  dissenting  opinions  in  the  two  trust  cases, 
165-166 ;  Differences  between  Harlan  and  White,  one  of 
phraseology,  166-167 ;  The  question  whether  the  Court 
has  reversed  itself,  168;  The  history  of  the  Trans-Mis- 
souri case  supports  this  contention,  168-169 ;  The  Court 
has  increased  the  effectiveness  of  the  law,  169-171 ;  Law 
also  strengthened  by  the  reversal  of  the  decision  in  the 
Knight  case,  171-172;  Some  uncertainty  remains  as  to 
legality  of  some  forms  of  combination,  172 ;  Present 
status  of  the  law  as  a  result  of  these  decisions,  173 ;  The 
Sherman  Law  inadequate  to  control  corporations,  173- 
174 ;  Federal  incorporation  and  an  administrative  body 
needed,  174-175;  Conclusions,  175-177. 


APPENDIX   A 

PAGE 

EXTRACTS  FROM  THE  OPINIONS  OF  CHIEF  JUSTICE  WHITE 
IN  THE  STANDARD  OIL  AND  AMERICAN  TOBACCO  CASES 
WITH  REFERENCE  TO  THE  CONSTRUCTION  OF  THE 
ANTITRUST  ACT  .  181 


APPENDIX   B 

DISSENTING  OPINION  OF  JUSTICE   HARLAN  IN  THE  STAND- 
ARD OIL  CASE 205 

XV 


CONTENTS 
APPENDIX  C 

PAGE 

THE  SHERMAN  ANTITRUST  ACT      ...  ...  225 

APPENDIX  D 

THE  ALDRICH  PLAN  FOR  MONETARY  LEGISLATION        .        .   228 
INDEX  239 


XVI 


CORPORATIONS   AND    THE   STATE 


CHAPTER  I 

ORIGIN   AND    DEVELOPMENT    OF    PRIVATE 
CORPORATIONS 

IT  is  the  purpose  of  these  lectures  to  discuss  the 
political,  social,  and  economic  conditions  which 
have  caused  the  growth  of  corporations,  and  to 
point  out  the  relation  which  exists  or  should  exist 
between  such  corporations  and  the  state.  It  is  not 
intended  to  neglect  the  form  and  organization  of 
corporations  which  are  subjects  of  undoubted  im- 
portance, but  particular  attention  will  be  given  to 
the  great  tendencies  and  the  general  facts  and 
principles  which  have  caused  the  modern  corpora- 
tion to  assume  its  importance  in  our  economic  and 
social  life. 

A  corporation  is  a  group  of  individuals  empowered 
by  law  to  act  as  a  single  person  and  endowed  by 
law  with  the  capacity  for  succession.  It  can  own 
property,  incur  obligations,  sue  or  be  sued  in  the 
same  manner  as  an  individual,  and  its  members 
usually  enjoy  the  advantage  of  limited  liability. 
While  the  personnel  of  a  corporation  may  change 
2  1 


CORPORATIONS  AND   THE   STATE 

from  time  to  time,  the  corporation  itself  can  con- 
tinue indefinitely.  It  is  this  feature  of  permanence 
which  constitutes  one  of  its  chief  advantages.  Sir 
Edward  Coke  expressed  his  view  of  the  corpora- 
tion as  follows:  "A  corporation  is  invisible,  im- 
mortal, has  no  soul,  neither  is  it  subject  to  the  im- 
becilities or  death  of  the  natural  body."  In  the 
Dartmouth  College  case,  the  following  definition 
was  given:  "A  corporation  is  an  artificial  being, 
invisible,  intangible,  and  existing  only  in  contem- 
plation of  law." 

The  idea  of  the  corporation  as  an  entity  separate 
from  the  individuals  composing  it  has  often  been 
emphasized  to  the  point  of  absurdity  and  used  as 
a  means  of  escape  for  officers  who  were  person- 
ally guilty  of  wrongdoing.  This  is  no  better  illus- 
trated than  in  the  argument  of  the  defendants  in 
the  North  River  Sugar  case,  to  the  effect  that  the 
corporation  itself  could  only  do  what  the  law  al- 
lowed it  to  do,  that  any  other  act  was  ultra  vires 
and  accordingly  the  act  of  individuals  and  not  of 
the  corporation.1  The  court  refused  to  accept  this 
reasoning  and  rightly  held  that  the  action  of  the 
majority  of  directors  was  the  action  of  the  cor- 
poration. This  legal  fiction  has  since  become 
largely  discredited ;  but  we  are  still  prone  to  for- 
get that  a  corporation  is  composed  of  individuals, 
and  that  its  directors  and  even  its  stockholders  have 
their  personal  responsibilities  to  the  general  public. 

1  121  N.  Y.,  582. 
2 


We  should  remember  also  that  the  corporation 
is  an  institution  which,  like  all  others,  has  been 
evolved  from  earlier  and  more  primitive  forms.  It 
is  but  one  manifestation  of  the  innumerable  in- 
stances of  the  association  of  individuals  in  society. 
The  modern  corporation  is  of  comparatively  recent 
origin,  but  as  long  ago  as  the  Middle  Ages,  and 
even  during  the  time  of  the  Roman  Republic,  there 
existed  organizations  of  individuals  with  corporate 
rights.  These  will  be  briefly  discussed  in  the 
course  of  this  chapter.  They  were  of  quite  a 
different  nature,  and  bore  little  resemblance  to  the 
present  day  commercial  and  industrial  organiza- 
tions and  hence  are  only  of  passing  interest. 

Two  factors  assume  especial  importance  in  the 
progress  of  the  human  race :  Increase  of  population, 
and  association  of  the  individual  units  which  make 
up  population. 

The  United  States  Census  Report  for  1900  quotes 
Adam  Smith  as  saying: 1 

"The  most  decisive  mark  of  prosperity  of  any 
country  is  the  increase  of  the  number  of  its  inhab- 
itants." 

An  increase  in  population  indicates  the  absence 
of  devastation  by  war  or  pestilence  and  the  exist- 
ence of  a  sufficient  supply  of  food — conditions  req- 
uisite for  advancement  in  civilization.  A  substan- 
tial increase  also  makes  possible  entrance  into  new 
fields  of  endeavor,  and  the  more  perfect  develop- 

1  Supplementary  Analysis,  p.  29. 
3 


CORPORATIONS  AND   THE  STATE 

ment  of  those  enterprises  and  activities  which  are 
already  in  existence. 

Advancement  in  civilization  has  usually  been 
contemporaneous  with  increase  of  population. 
Rightly  considered,  however,  increase  of  popula- 
tion is  rather  an  indication  than  a  cause  of  advance- 
ment. The  two 'most  populous  countries  of  the 
world,  China  and  India,  have  been  marked  by  stag- 
nation and  lack  of  progress  contemporaneously 
with  the  wonderful  advance  of  other  countries.  It 
thus  appears  that  the  quality  of  population  and  its 
ability  to  promote  increased  effectiveness  is  more 
important  than  mere  numerical  increase. 

Association  is  invariably  in  evidence  wherever 
humanity  has  successfully  striven  to  work  out  its 
problems.  The  fact  of  co-operation  has  ever  been 
manifest,  however  baffling  it  may  be  to  express  its 
cause  in  exact  terms ;  whether  its  origin  is  due  to 
instinct,  like-mindedness,  or  common  interest  is  a 
question  for  the  sociologist.  If  we  were  to  use  a 
single  sentence  to  describe  its  existence  we  might 
say  that  association  has  its  foundation  in  an  intelli- 
gent exercise  of  the  desire  for  human  happiness, 
for  life  becomes  tolerable  and  progress  is  made  easy 
only  where  there  is  a  readiness  for  the  association 
or  co-operation  of  individuals  in  some  form  of  social 
organization.  On  this  subject  Mr.  Carlyle  very 
well  said  in  one  of  his  earlier  essays: 

''Such  is  society,  the  vital  articulation  of  many 
individuals  into  a  new  collective  individual ;  greatly 

4 


ORIGIN   OF  PRIVATE   CORPORATIONS 

the  most  important  of  man's  attainments  on  this 
earth;  that  in  which,  and  by  virtue  of  which,  all 
his  other  attainments  and  attempts  find  their 
arena,  and  have  their  value." 

The  idea  of  association  goes  back  to  the  very 
cradle  of  the  human  race.  It  is  one  of  the  first 
lessons  of  progress.  It  has  made  great  accomplish- 
ments possible  to  man,  for  through  association  he 
has  been  able  to  conquer  nature  and  transform  the 
face  of  the  globe.  It  extends  to  all  phases  of  man's 
activities,  to  his  work,  his  pleasures,  his  studies 
and  his  achievements.  It  means  power  united  with 
power,  force  joined  to  force,  genius  multiplied  by 
genius.  By  it  the  knowledge  and  skill  of  each  be- 
comes a  source  of  blessing  to  all.  It  substitutes 
for  the  savagery  and  lack  of  humanity  which  be- 
long to  isolation,  the  beginning  of  all  refinement 
and  regard  for  human  welfare. 

The  first  distinct  step  in  association  was  for  re- 
ligious or  governmental  purposes.  It  would  be  out- 
side of  the  scope  of  this  chapter  to  consume  any 
considerable  time  in  tracing  the  origin  of  the  state 
or  of  forms  of  worship.  According  to  the  view  of 
Aristotle,  the  family  appeared  first;  when  several 
families  were  united  and  association  aimed  at  some- 
thing more  than  merely  supplying  daily  needs,  then 
the  village  came  into  existence.  When  several 
villages  were  united  into  communities,  perfect  or 
large  enough  to  be  nearly  or  quite  self-sufficing, 
the  state  came  into  existence.  Along  with  this 

5 


CORPORATIONS  AND   THE  STATE 

process  of  evolution  which  gave  rise  to  the  state, 
numerous  subdivisions  or  groups  in  society  were 
gradually  formed  for  common  worship,  or  for  the 
accomplishment  of  any  object  which  required 
strength  or  skill  greater  than  that  belonging  to  a 
single  individual. 

Whatever  may  have  been  the  specific  form  of  as- 
sociation which  led  to  political  organization,  the 
essential  fact  is  that  man's  desire  for  associated 
action  and  social  relationship  caused  the  formation 
of  various  groups  and  organizations,  and  helpful 
development  kept  pace  with  his  capacity  for  asso- 
ciation. Thus  the  origin  of  the  state,  whether  it 
proceeded  from  the  family  as  a  nucleus,  from  di- 
vine origin,  from  social  contract,  or  from  the  acqui- 
sition of  supremacy  by  a  despot  of  superior  strength 
and  gift  for  command,  is  in  any  case  an  expression 
of  a  desire  and  capacity  for  that  order  and  effec- 
tiveness which  can  only  be  obtained  by  the  co- 
operation of  individuals. 

There  are  three  general  points  connected  with 
this  subject  which  should  be  considered  in  their 
order:  (1)  That  a  close  connection  exists  between 
political  associations  and  private  associations,  or 
corporations,  a  connection  the  importance  of  which 
has  been  conceded,  but  not  sufficiently  elaborated. 
(2)  That  conditions  have  existed  or  did  exist  in 
earlier  times  such  that  the  modern  corporation  with 
its  characteristic  features  could  not  have  succeeded 
until  less  than  two  hundred  years  ago,  save  by  the 

6 


ORIGIN   OF   PRIVATE   CORPORATIONS 

aid  of  monopolistic  privileges.  (3)  That  the  nat- 
ural growth  of  the  corporation  is  characterized 
by  three  eras:  (a)  Monopoly,  (b)  Competition, 
(c)  Combination — accompanied  by  state  regulation. 

It  is  a  notable  fact  that  in  the  most  primitive 
times,  extensive  operations  were  largely  conducted 
by  the  state  itself,  at  times  by  despots  who  built 
great  public  works  or  undertook  mammoth  enter- 
prises for  their  own  comfort  or  for  a  display  of 
their  own  munificence.  The  great  pyramid  prob- 
ably contains  a  larger  quantity  of  masonry  than 
any  detached  structure  in  the  world.  The  kings 
of  Assyria  and  Babylonia  built  numerous  canals 
and  reservoirs  to  promote  agriculture  by  irrigation. 
King  Solomon  is  said  to  have  organized  a  commer- 
cial department  of  state  and  engaged  in  foreign 
trade  for  personal  gain. 

It  was  not  alone  in  the  field  of  great  public  works 
and  undertakings  of  this  nature  that  the  ancient 
state  exerted  itself.  It  became  at  times  a  trader, 
as  in  the  case  of  Rome,  when  she  brought  great 
quantities  of  grain  from  subject  provinces  or  ob- 
tained it  by  purchase,  in  order  to  furnish  food  for 
the  imperial  city.  There  it  was  sold  or  given  out 
in  largesses.  To-day,  living  in  places  where  trans- 
portation facilities  are  available  by  railroad  and 
steamship,  we  forget  how  difficult  in  earlier  days 
was  the  problem  of  furnishing  a  supply  of  food  to 
great  cities.  Lack  of  food  was,  in  a  very  impor- 
tant sense,  a  limit  to  their  growth.  This  condition 

7 


CORPORATIONS   AND   THE   STATE 

was  notable  in  the  case  of  Rome  and  of  Athens. 
The  large  colonies  of  Greece,  such  as  Syracuse,  and 
those  in  Asia  Minor,  for  a  time  attained  a  more 
rapid  growth  than  communities  at  home,  because 
they  were  in  the  midst  of  great  fertile  fields,  where 
supplies  of  food  were  more  readily  obtainable. 
This  shows  one  reason  for  state  activity ;  the  wel- 
fare of  the  state,  its  very  life  depended  upon  feed- 
ing its  people.  Demosthenes,  in  his  orations,  men- 
tions a  class  of  regulations  under  which  all  those 
who  sailed  ships  to  Athens  had  to  bring  a  certain 
quantity  of  grain,  and  there  was  another  law  that 
if  the  shipper  from  the  Crimea  unloaded  any  part 
of  his  cargo  on  the  way,  it  was  considered  an 
offense  punishable  by  death. 

This  activity  of  the  state  is  still  manifest  in  the 
carrying  out  of  public  works,  such  as  the  improve- 
ment of  rivers  and  harbors,  and  the  construction 
of  public  buildings.  In  a  limited  way,  industries 
are  still  conducted  by  the  state,  as  in  the  case  of 
the  porcelain  manufacturers  of  Dresden,  Vienna, 
Berlin,  and  of  Sevres,  in  France.  This  participa- 
tion of  the  state  in  trade  is  still  further  illustrated 
by  the  monopoly  of  some  specific  article  as  a  source 
of  revenue.  France,  Spain,  Italy,  Russia,  Servia, 
Greece,  Turkey,  even  so  advanced  a  commercial 
country  as  the  Netherlands,  preserve  certain 
monopolies,  such  as  in  tobacco,  salt,  or  matches, 
salt  perhaps  being  the  most  common.  The  most 
lucrative  monopoly  is  that  of  spirits,  reserved  by 

8 


ORIGIN   OF   PRIVATE   CORPORATIONS 

Russia,  from  which  the  empire  realizes  an  income  of 
$360, 000, 000  a  year.  Indeed,  these  state  monopolies 
to-day  yield  an  aggregate  revenue  greater  than 
the  total  revenue  of  the  same  countries  seventy- 
five  years  ago. 

We  come  next  to  a  second  stage,  in  which  the 
state  is  in  close  partnership  with  the  individual 
and  which  prevailed  until  less  than  two  hundred 
years  ago.  Probably  the  best  illustration  of  this 
class  of  enterprise  is  the  East  India  Company,  es- 
tablished in  the  year  1599.  The  Muskovy  Company, 
established  in  1555  in  the  reign  of  Philip  and  Mary, 
the  Levant  or  Turkey  Company,  established  in 
1581,  and  one  known  as  the  New  Zealand  Company, 
organized  as  late  as  1841,  are  other  illustrations  of 
this  class.  A  characteristic  feature  of  these  organi- 
zations was  that  the  state  granted  the  charter  and 
conferred  a  monopoly  of  trade.  The  grantee  paid 
a  large  share  of  the  profits  to  the  state,  and  what 
perhaps  is  more  important  than  all,  agreed  that  all 
the  territory  acquired  should  be  the  property  of 
the  sovereign  who  granted  the  charter. 

The  East  India  Company  was  more  a  political 
than  a  commercial  organization,  notwithstanding 
the  magnitude  of  its  trade  operations  and  of  its 
capital  which,  proportionately  to  the  wealth  of  the 
times  was  greater  than  that  to-day  of  the  Standard 
Oil  Company  or  the  United  States  Steel  Corpora- 
tion. Its  duties  to  the  government,  its  political 
side,  absorbed  more  of  its  energy  than  the  devel- 
'  9 


CORPORATIONS   AND   THE   STATE 

opment  of  trade.  It  was  compelled  to  provide  ports, 
docks,  and  facilities  for  future  commerce.  Then 
it  was  also  necessary  to  maintain  order  among  the 
people.  To  do  this,  the  company  had  the  right  to 
make  peace  and  war,  to  make  treaties,  to  maintain 
a  police  force  and  even  armies.  Whenever  any  ex- 
tortion or  tyranny  was  charged  to  Lord  Clive  or 
Warren  Hastings,  they  made  the  excuse  that  their 
course  was  necessary  in  order  to  perform  the  polit- 
ical functions  which  the  sovereign  imposed  upon 
them.  It  was  alleged  that  cruelty  was  practised 
because  requisite  to  maintain  order  and  supremacy. 
This  form  of  organization  existed,  especially  in 
England,  for  a  very  considerable  time.  North 
America  was  discovered  by  the  Cabots  under  a 
charter  which  gave  to  them  and  their  associates 
the  exclusive  right  to  trade  in  the  countries  dis- 
covered, or  explored,  but  conferred  upon  the  King 
of  England  title  to  all  such  territory. 

We  are  often  wont  to  think  that  rules  in  regard 
to  corporations  under  any  form  of  government  at 
any  particular  time,  are  due  to  the  caprices  of 
kings,  or  to  the  theories  of  legislators,  or  as  is 
sometimes  said  they  are  incident  to  the  spirit  of 
the  times.  Usually,  however,  we  find  more  sub- 
stantial causes.  What  was  the  reason  companies 
were  given  monopolies  in  those  days?  It  should  be 
borne  in  mind  that,  beginning  with  the  earliest 
stages  of  political  development,  different  tribes 
and  nations  were  in  a  state  of  antagonism,  of  al- 

10  * 


ORIGIN   OF   PRIVATE   CORPORATIONS 

most  constant  warfare.  The  subject  could  not  go 
outside  of  his  own  country  without  exposing  him- 
self to  the  danger  of  robbery  or  of  death.  Thus 
the  first  duty  of  each  citizen  was  to  protect  the 
state  or  society  of  which  he  was  a  member.  Kings 
asserted,  as  did  later  Louis  XIV,  their  prerogatives, 
and  claimed  that  the  whole  state  centered  in  them. 
In  a  measure  this  was  a  necessity,  in  order  that 
there  might  be  such  organization  that  the  forces 
of  the  nation  would  readily  respond  for  defense 
against  attack.  Whether  it  was  a  republic  or  a 
monarchy,  everything  was  subordinate  to  the  state. 
This  was  the  conception  of  the  ancient  world,  of 
Greece  and  Rome,  and  it  existed  until  within  a  few 
centuries  of  our  own  time  in  a  more  or  less  modi- 
fied form.  Added  to  this,  the  state  not  only  exer- 
cised absolute  control  in  military  and  civil  admin- 
istration, but  over  all  the  activities  of  each  of  its 
citizens.  It  was  necessary  that  the  state  acquire 
revenue  and  the  sources  were  not  readily  available. 
Whenever  any  one  desired  a  privilege,  which  would 
bring  profit,  it  was  granted  on  condition  that  a 
share  of  this  profit  should  go  to  the  state.  The 
labor  of  the  ancient  world  was  not  so  willing  or  so 
alert  as  that  of  the  modern.  Much  of  it  was  per- 
formed by  slaves.  But  the  king  was  the  only  one 
who  could  bring  to  any  enterprise  a  sufficient  num- 
ber of  workmen  to  accomplish  any  great  result. 
Thus  in  the  early  beginnings  of  large  scale  opera- 
tions, there  was  almost  absolute  dependence  upon 

11 


CORPORATIONS  AND   THE  STATE 

the  state.  After  some  degree  of  progress  had  been 
made,  there  succeeded  a  quasi-partnership  between 
the  state  and  the  individual  as  already  described. 

The  dependence  of  commerce  and  industry  upon 
the  state  did  not  arise  from  the  necessity  of  pro- 
tection against  foreign  enemies  alone.  The  estab- 
lishment of  domestic  order  and  the  administration 
of  justice  were  necessary  as  well.  Commercial  as- 
sociations or  organizations  could  not  exist  without 
courts,  except  in  a  crude  form  and  with  much  un- 
certainty. It  was  essential  that  rules  should  be  es- 
tablished relating  to  contracts,  and  that  the  rights 
of  corporate  members  among  themselves  and  as 
between  themselves  and  outsiders  should  be  defined. 
In  securing  these  objects,  the  state  must  exercise 
control.  Another  reason  for  monopoly  and  for  the 
existence  of  a  close  association  with  the  state  was 
derived  from  the  standpoint  of  the  investor.  Com- 
mercial enterprises  involved  very  serious  danger 
and  were  always  attended  by  great  risks.  Capital 
was  scarce  and  those  who  invested  could  not  be  in- 
duced to  engage  in  uncertain  enterprises  until  a 
monopoly  was  granted.  One  claim  frequently  ad- 
vanced was  that  those  who  prepared  the  way  for 
profitable  trade  might  have  their  profits  snatched 
from  them  by  competitors  who  had  not  ventured  to 
incur  the  original  risks. 

One  explanation  why  the  ordinary  form  of  cor- 
porate organization  proved  unprofitable  without  a 
monopoly  until  within  less  than  two  hundred  years, 

12 


is  given  by  Adam  Smith  in  his ' '  Wealth  of  Nations, ' ' 
published  in  1776.  He  says  that  the  joint-stock 
company,  a  form  of  corporate  organization,  can- 
not without  monopoly  compete  with  the  individual 
unless  it  be  in  a  case  where  the  business  is  prac- 
tically one  of  routine  or  where  there  is  such  a 
uniformity  of  method  as  admits  of  little  or  no 
variation.  He  avers  that  the  superior  interest  and 
vigilance  of  the  individual  will  cause  him  to  suc- 
ceed in  competition  with  the  joint-stock  company 
unless  such  conditions  exist.  There  are  four  kinds 
of  enterprise  in  which  he  says  the  corporate  form 
of  organization  may  succeed.  These  are  banking, 
insurance,  the  making  and  maintaining  of  a  navi- 
gable cut  or  canal,  and  the  furnishing  of  a  water 
supply  for  cities.  All  the  other  numerous  processes 
of  manufacture  and  commerce  would,  in  his  judg- 
ment, be  conducted  at  a  loss  by  the  joint-stock  com- 
pany without  a  monopoly. 

Mr.  J.  R.  McCulloch,  in  his  very  valuable  "Dic- 
tionary of  Commerce, "  published  in  1832,  reiterates 
the  views  of  Adam  Smith,  quotes  his  words  and 
makes  the  same  four  exceptions.  Even  in  so  late 
an  edition  as  that  of  1850,  he  still  expresses  the 
belief  that  the  joint-stock  form  of  organization 
could  not  compete  with  individual  management. 

There  was  a  variety  of  causes  for  the  absence 
of  joint-stock  companies  in  manufacturing  enter- 
prises before  the  latter  part  of  the  eighteenth  cen- 
tury. The  principal  one  was  that  combined  effort 

13 


CORPORATIONS  AND  THE  STATE 

and  capital,  save  in  commercial  enterprises  where 
the  development  of  large  scale  operations  was 
naturally  earlier,  had  no  great  advantage  over  the 
individual  in  the  so-called  "Pre-machinery  Age." 

Defoe  mentions  a  visit  to  the  woolgrowing  dis- 
tricts. He  found  the  father  and  boys  of  the  family 
tending  the  sheep,  while  the  wife  and  daughters, 
including  all  who  were  over  five  years  of  age,  were 
engaged  in  the  work  of  spinning  and  weaving  in 
the  house. 

In  the  exceedingly  narrow  market  which  existed 
at  that  time,  this  method  of  making  cloth  was 
profitable,  and  in  fact  production  on  a  large  scale 
could  only  be  accomplished  by  bringing  large  num- 
bers engaged  in  a  particular  form  of  manufacture 
in  one  community.  Yet  the  large  community  would 
have  no  material  advantage  by  a  division  of  labor, 
and  their  product  would  be  likely  to  overstock  the 
market.  Thus  each  locality  or  district  endeavored 
as  far  as  possible  to  furnish  its  own  supply  of 
clothing. 

No  material  change  occurred  until  early  in  the 
eighteenth  century.  With  the  introduction  of  the 
first  labor-saving  machine,  capital  became  an  im- 
portant element  in  production.  The  relation  be- 
tween capital  and  labor  as  factors  in  manufacture 
was  changed,  and  with  the  rapid  development  of 
machinery  and  improved  means  for  transportation, 
an  economic  revolution  took  place.  Improvements 
in  communication  were  equally  marked.  In  the 

14 


ORIGIN    OF   PRIVATE   CORPORATIONS 

primitive  method  of  transportation  the  man  carried 
the  burden  on  his  back.  Later  he  purchased  a 
horse  or  a  mule,  which  became  an  investment  of 
capital  to  that  extent.  Capital  was  also  expended 
for  the  construction  of  roads.  The  first  ways  of 
communication  were  rough  by-paths,  but  when  the 
importance  of  better  roads  and  improved  means  of 
carriage  came  to  be  realized,  highways  were  con- 
structed, as  in  the  case  of  the  celebrated  road  from 
Vera  Cruz  to  the  City  of  Mexico,  one  of  the  most 
important  in  the  New  World.  These  improvements 
made  a  wider  market  available  and  led  to  the  con- 
solidation of  manufacturing  in  localities  possessing 
superior  facilities.  In  the  selection  of  these  locali- 
ties, competition  played  an  important  part.  Com- 
petition also  became  an  important  factor  in  each 
locality,  because  cheapness  of  production  and  skill 
in  distribution  were  essential  to  success. 

These  factors,  the  invention  of  machinery  and 
improvements  in  transportation,  caused  the  growth 
of  the  joint-stock  company  or  corporation,  and  they 
also  caused  an  era  of  monopoly  to  be  succeeded  by 
one  of  competition.  There  were,  of  course,  other 
powerful  factors  at  work.  The  growth  of  the  mod- 
ern corporation  and  of  competition  is  in  great  meas- 
ure contemporaneous  with  the  growth  of  popular 
government  and  greater  civil  rights.  The  individ- 
ual counted  for  more,  and  the  king  or  state  for  less. 
Sovereigns  began  to  realize  that  their  power  and 
the  strength  of  the  countries  over  which  they  held 

15 


CORPORATIONS   AND   THE   STATE 

sway  were  largely  dependent  upon  the  prosperity 
and  wealth  of  their  subjects.  Again  capital  for  in- 
vestment was  increasing.  All  these  things  com- 
bined to  bring  about  a  transition  from  a  period  of 
monopoly  to  one  of  competition.  The  formation  of 
companies  and  stock  jobbing  assumed  considerable 
importance  in  England  in  the  later  years  of  the 
seventeenth  century.  But  the  new  regime  did  not 
become  well  established  until  after  the  middle  of 
the  eighteenth  century. 

Before  considering  the  present  period  of  combi- 
nation and  regulation  it  is  desirable  to  briefly  re- 
view the  origin  and  forms  of  some  of  the  ancient 
corporations  and  associations.  They  are  of  subor- 
dinate importance  in  the  elucidation  of  this  subject, 
and  chiefly  valuable  because  they  show  the  univer- 
sal impulse  for  association  and  co-operation.  The 
political  and  religious  organizations  of  the  ancient 
world  furnished  the  model  for  those  which  were 
commercial  and  industrial. 

We  have  no  satisfactory  data  relating  to  the 
commercial  and  industrial  associations  of  Tyre. 
Such  information  would  be  valuable  if  we  possessed 
it,  for,  all  things  considered,  the  trade  and  industry 
of  that  city  present  the  most  remarkable  develop- 
ment in  the  history  of  commerce.  Tyrean  boats 
probably  went  around  the  Cape  of  Good  Hope,  fif- 
teen hundred  years  before  the  Christian  era.  In 
Greece  there  doubtless  existed  partnerships  and 
associations,  but  the  idea  of  an  association  or  cor- 

16 


ORIGIN    OF   PRIVATE   CORPORATIONS 

poration  as  a  distinct  person  or  entity,  separate 
from  the  individuals  of  which  it  is  composed,  did 
not,  so  far  as  we  know,  exist  until  the  days  of 
Rome. 

The  germ  of  the  corporation  first  appears  in  the 
Roman  collegia,  which  in  many  respects  were  simi- 
lar to  the  guilds  of  medieval  England  and  Europe. 
But  in  the  great  abundance  of  that  which  has 
been  written  upon  collegia  and  guilds,  it  is  unfor- 
tunate that  more  light  has  not  been  thrown  upon 
their  origin. 

The  following  may  be  ventured  as  a  plausible  ex- 
planation. It  is  generally  believed  that  the  ethnic 
form  of  society  was  the  first  form  of  association. 
There  were  first  the  families,  then  the  gens  or  clans, 
and  later  the  tribes.  The  principal  bond  which 
held  these  groups  together  was  kinship,  either  real 
or  fictitious.  Early  tribal  relations  were  based  on 
the  group  as  a  unit.  Members  of  the  group  had  no 
individuality.  In  time  the  ties  of  kinship  became 
less  binding  by  the  infusion  of  strangers  or  the 
disintegration  of  the  older  groups  by  migration  or 
war.  In  order  to  provide  means  of  administration 
for  the  new  conditions,  it  was  necessary  to  form 
other  groups,  based  upon  locality,  occupation,  or 
other  bonds  of  union.  Solon,  at  Athens,  and  Numa, 
at  Rome,  created  new  divisions  of  society  in  this 
way.  The  latter  is  said  to  have  established  nine 
associations  of  artisans  at  Rome.  These  were  the 
earliest  collegia  of  which  there  is  any  mention.  In 
3  17 


CORPORATIONS  AND   THE   STATE 

this  new  form  of  organization,  as  in  tribal  society, 
the  individual  was  still  but  one  member  of  his 
group  from  which  he  could  only  with  difficulty  de- 
tach himself. 

During  the  early  Republic,  these  Roman  corpora- 
tions became  very  numerous  and  played  a  highly 
important  part  in  the  political  and  social  organiza- 
tion of  that  period.  They  were  of  notably  diverse 
nature,  some  were  public,  others  semi-public,  and 
still  others  purely  private.  They  had  for  their  aim 
religion,  politics,  business,  and  sometimes  pleasure. 
At  a  later  time,  certain  duties  were  imposed  upon 
them  in  the  way  of  paying  taxes  or  rendering  ser- 
vice to  the  state.  In  the  days  of  the  later  Repub- 
lic, they  were  subjected  to  the  strictest  regulation 
by  the  state,  because  of  the  fear  that  they  might 
become  sources  of  sedition.  About  64  B.C.  the 
Senate  passed  a  resolution  suppressing  illegal  col- 
legia. Six  years  later  Clodius  did  all  in  his  power 
to  nullify  this  resolution  and  to  increase  their  num- 
ber. One  of  the  reasons  why  the  Senate  had  legis- 
lated against  them  was  the  suspicion  that  they 
were  concerned  in  the  conspiracy  of  Catiline. 
Julius  Caesar  made  use  of  them  at  election  time, 
but  later,  when  he  had  the  responsibilities  of  a 
dictator,  he  issued  a  decree  suppressing  all  illegal 
collegia  and  very  much  diminished  their  number. 
In  the  time  of  Augustus  they  were  strictly  con- 
trolled, and  none  could  be  formed  without  the  im- 
perial consent. 

18 


ORIGIN    OF   PRIVATE   CORPORATIONS 

It  is  interesting  to  note  the  manner  in  which  the 
collegia  came  to  assume  the  form  of  corporate  en- 
tity. The  original  Roman  idea  was  that  the  prop- 
erty of  the  state,  or  of  each  city  (municipium)  was 
the  property  of  no  one,  but  this  became  extremely 
inconvenient  and,  after  a  time,  the  conception  of 
the  municipality  as  a  juristic  person  was  evolved. 
The  municipality  must  have  existence  as  a  munici- 
pality, independent  of  its  membership.  So  this 
conception  of  a  juristic  person  or  corporation  first 
applied  to  the  municipality  was  afterward  by  a 
ready  translation  applied  to  the  collegia. 

The  guilds  of  continental  Europe  and  England 
show  the  same  general  development.  It  cannot  be 
said  that  the  guilds  were  a  derivative  from  the 
collegia,  although  this  assertion  is  sometimes  made. 
When  we  recognize  similar  institutions  in  different 
countries  we  are  prone  to  make  the  mistake  of 
concluding  that  one  is  derived  from  the  other 
when  we  should  ascribe  the  similarity  to  common 
human  impulses  and  desires  which  are  everywhere 
at  work.  The  same  fact  holds  true  in  regard 
to  the  legal  conception  of  the  corporation  in  Eng- 
land. It  is  sometimes  said  that  it  was  derived 
entirely  from  the  Roman  law.  No  doubt  in  the 
development  of  the  corporation  law  of  England, 
there  was  frequent  reference  to  the  Roman  civil 
law,  and  to  the  canon  law;  but  the  beginning  of 
the  legal  view  of  the  corporation  was  independent 
of  Roman  influence.  If  there  was  any  extrane- 

19 


CORPORATIONS   AND   THE   STATE 

ous  influence  in  the  beginning,  it  was  rather  the 
Norman. 

It  is  not  necessary  for  our  purpose  to  discuss  in 
detail  the  many  forms  of  corporate  organization 
that  existed  during  the  Middle  Ages.  None  was 
industrial  and  none  commercial  until  after  1600. 
Nevertheless,  the  merchant  and  craft  guilds  and 
municipia  on  the  one  hand,  and  the  numerous  re- 
ligious, educational,  and  eleemosynary  corporations 
on  the  other,  all  performed  important  functions 
and  constituted  distinct  steps  in  the  evolution  of 
the  corporate  idea. 

After  this  rather  cursory  review  of  the  develop- 
ment of  corporate  organizations  from  early  times, 
let  us  now  look  to  the  present  problems  and  con- 
sider what  factors  are  causing  the  era  of  competi- 
tion to  be  superseded  by  one  of  combination.  It 
is  evident  that  if  the  forces  of  competition  have 
full  sway,  they  will  exert  certain  destructive  influ- 
ences detrimental  to  human  welfare. 

Enterprises  are  conducted  in  sharp  conflict  one 
with  the  other  when  they  should  either  occupy 
separate  fields  or  be  managed  in  harmony.  An 
immediate  manifestation  of  undue  competition  is 
the  forcing  of  profits  in  enterprises  to  a  minimum. 
In  fact,  business  is  frequently  conducted  at  a  loss, 
and  the  rule  of  the  "survival  of  the  fittest"  is  most 
severe  under  a  regime  of  free  and  unrestrained 
competition.  The  methods  commonly  employed  to 
neutralize  its  effects  in  the  last  thirty  or  forty  years 

20 


ORIGIN    OF   PRIVATE   CORPORATIONS 

have  been  gentlemen's  agreements,  the  formation 
of  pools,  division  of  territory,  and  agreements  as 
to  prices  and  the  respective  quantities  to  be  sold 
by  one  company  or  another;  then  came  the  trust 
formation,  under  which  stockholders  in  different 
concerns  turned  over  their  respective  shares  to  a 
board  of  trustees.  As  might  have  been  expected, 
the  courts  declared  the  trust  agreement  to  be  illegal. 
The  ownership  of  stock  in  a  corporation  is  not 
merely  an  indication  of  the  property  owned;  it  not 
only  conveys  a  privilege,  but  it  carries  a  responsi- 
bility as  well.  Thus  the  owner  of  stock  cannot 
relieve  himself  of  his  responsibility  in  the  manage- 
ment of  a  corporation  of  which  he  is  a  member  and 
turn  it  over  to  some  one  else. 

Next  came  the  holding  company,  which  is  virtu- 
ally a  trust  in  a  new  and  more  effective  form. 
Although  the  right  of  one  corporation  to  hold  stock 
in  another  had  been  granted  in  a  few  cases  by 
special  acts  of  state  legislatures,  this  practice  was 
first  recognized  in  a  general  statute  by  the  New 
Jersey  Corporation  Law  of  1899.  Contemporaneous 
with  this  latest  style  of  organization  came  the 
formation  of  new  companies  on  a  larger  scale,  with 
the  intention  of  concentrating  branches  of  industry 
or  commerce  under  one  management.  This  move- 
ment reached  its  culmination  about  the  year  1904, 
being  checked  by  the  adverse  decision  of  the 
Supreme  Court  in  the  Northern  Securities  Case  and 
the  more  vigorous  enforcement  of  the  Sherman 

21 


CORPORATIONS   AND   THE   STATE 

Antitrust  Law  under  the  Roosevelt  administra- 
tion. To  what  extent  it  will  be  carried  in  the 
future,  can  only  be  conjectured.  Already  the  rail- 
ways are  fast  combining  into  a  few  large  systems, 
each  dominating  a  certain  territory,  as  is  the  case 
in  England  and  France,  while  in  manufacturing  the 
latest  combinations  embrace  not  merely  competing 
branches  of  an  industry,  but  also  all  the  primary 
and  secondary  processes  of  production. 

An  apprehension  exists  in  the  minds  of  many  per- 
sons that  the  state  will  be  overshadowed  or  over- 
borne by  corporations  in  the  no  distant  future.  In 
order  to  show  that  this  apprehension  is  without 
foundation,  it  is  only  necessary  to  refer  to  certain 
well-ascertained  facts.  In  the  first  place  the  pre- 
sumption that  political  organization  must  prevail 
over  corporate  organization  rests  upon  the  greater 
number  of  its  members  and  the  fact  that  a  corpora- 
tion can  exist  only  by  authority  of  the  state.  Let 
us  suppose  for  illustration  that  all  citizens  of 
this  Republic  should  become  financially  interested 
in  corporations.  Agreement  among  them  would, 
nevertheless,  be  impossible  because  of  the  con- 
trariety of  interests.  In  the  first  place  we  would 
have  the  opposing  interests  of  the  consumer  and 
the  producer.  How  could  all  these  be  brought  into 
unison  so  as  to  endanger  the  state?  The  relation 
of  the  employer  and  employee  furnishes  another 
illustration.  But,  it  is  said,  the  state  by  collusion 
with  the  corporations  may  be  overshadowed  or  over- 

22 


ORIGIN    OF   PRIVATE   CORPORATIONS 

thrown.  When  we  analyze  this  contention,  it  is 
virtually  a  declaration  that  the  citizen  is  in  collu- 
sion with  himself.  In  some  localities  corporate 
power  may  be  so  strong  that  it  can  secure  undue 
privileges,  but  when  the  question  is  clearly  pre- 
sented and  the  great  mass  of  people  understand  the 
situation,  the  state  that  creates  the  corporations 
and  can  destroy  them,  must  prevail. 

The  greater  permanence  of  political  institutions 
is  another  reason.  Industry  and  commerce  in 
their  operations  undergo  constant  changes;  old 
methods  and  instruments  are  being  discarded 
and  new  ones  adopted ;  the  location  of  centers  of 
industry  and  commerce  is  constantly  shifting 
from  place  to  place.  The  principal  seat  of  a  branch 
of  manufacture  may  be  in  Massachusetts  in  one 
decade,  in  Pennsylvania  or  Ohio  in  another.  With 
each  change  there  is  necessarily  some  decrease  in 
the  degree  of  power  which  the  corporation  enjoys. 
In  forms  of  government  there  is  not  the  same 
change,  and  this  fact  adds  stability  to  political 
organization  which  commercial  organization  can- 
not possess.  In  the  third  place,  while  the  desire 
for  a  livelihood  and  for  the  acquisition  of  wealth 
is  a  factor,  the  effect  of  which  upon  the  individual 
is  not  likely  to  be  exaggerated,  nevertheless  senti- 
ments of  attachment  to  country,  patriotism,  and 
justice  have  in  the  long  run  an  influence  which 
makes  them  quite  as  potent  as  the  desire  for  ma- 
terial advancement.  There  always  will  be  some 

23 


CORPORATIONS   AND   THE   STATE 

whose  motto  is  "Put  money  in  thy  purse,"  but  a 
great  multitude  of  others  will  impress  upon  the 
citizen  the  necessity  of  the  protection  of  the  state 
and  the  nobility  of  loyalty  to  it.  They  will  say,  in 
the  language  of  the  drama  of  "Wilhelm  Tell," 

"Cleave  to  thy  fatherland;  thy  country  dear, 
Grapple  to  that  with  thy  whole  heart  and  soul ! 
Thy  power  is  rooted  deep  and  strongly  here." 


CHAPTER  II 

NATURE    OF    COMBINATIONS    IN    THE    UNITED 
STATES    AND    ABROAD 

THE  tendency  toward  combination  in  the  indus- 
trial world  is  everywhere  manifest.  It  is  not  con- 
fined to  any  one  country  or  to  any  one  industry, 
although  the  particular  form  that  it  takes,  the 
extent  to  which  it  is  carried,  and  the  policies 
adopted  by  different  countries  show  considerable 
variation.  In  popular  language  the  word  "  com- 
bination" is  generally  understood  to  mean  opera- 
tions on  a  large  scale,  but  the  two  are  not  neces- 
sarily synonymous.  A  great lorganization  may  be 
formed  directly  instead  of  by  the  consolidation  of 
smaller  concerns.  Still  that  is  not  the  most  fre- 
quent origin  of  large  scale  operations  of  the  present 
day,  especially  in  the  United  States.  The  Steel 
Corporation  is  a  good  example  of  the  usual  method 
pursued.  This  gigantic  combination  embraces  a 
considerable  number  of  large  single  corporations, 
such  as  the  Carnegie  Steel  Company,  and  derives 
benefit  from  the  experience  and  patronage  of  its 
constituent  members. 

There  are  two  distinct  sets  of  causes  underlying 
the  movement  toward  combination : 

25 


CORPORATIONS  AND   THE   STATE 

1.  Those  which  are  normal  and  responsive  to 
those  economic  laws  which  make  for  cheapness  or 
efficiency. 

2.  Those  operating  under  conditions  which  are 
not  normal,  in  which  cheapness  and  efficiency  are 
entirely  subordinate  to  private  gain  and  efforts  to 
secure  monopoly. 

Among  the  first  class  are  the  diminished  cost  per 
unit  of  production,  better  utilization  of  capital,  ad- 
vantages in  purchasing  raw  material  and  in  obtain- 
ing improved  mechanism.  Substantial  advantage 
can  also  be  secured  from  the  more  perfect  organi- 
zation made  possible  in  large  establishments  by 
the  division  of  labor  and  the  manufacture  of  dis- 
tinct articles  in  separate  shops.  Large  concerns 
also  obtain  increased  profits  from  the  manufacture 
of  by-products,  thus  utilizing  material  which  would 
otherwise  be  wasted.  Smaller  establishments  with 
limited  capital  could  not  utilize  this  material  be- 
cause of  an  insufficient  supply.  Some  time  ago, 
the  manager  of  a  company  proposing  to  construct 
coke  ovens,  gave  figures  showing  that  for  $400,000 
ovens  could  be  built  for  producing  a  certain  quan- 
tity of  coke,  while  for  $1,600,000  a  plant  could  be 
constructed  from  which  there  would  be  by-products 
in  the  form  of  gas  and  sulphate  of  ammonia,  which 
would  much  more  than  pay  an  income  on  the  in- 
creased cost;  indeed  would  make  it  possible  to  fur- 
nish the  coke  for  a  very  small  sum.  The  report 
made  on  the  Beef  Industry  some  years  ago  by  the 

26 


NATURE   OF   COMBINATIONS 

Bureau  of  Corporations,  even  went  so  far  as  to 
say  that  without  the  utilization  of  the  by-products 
the  business  would  be  unprofitable  at  the  prices 
charged. 

The  economies  in  distribution  are  even  greater 
than  those  possible  in  production.  The  larger  the 
product  and  the  greater  the  variety,  the  less  the 
expense  in  delivering  it  to  the  middleman  or  to  the 
consumer.  Substantial  economies  can  be  secured 
in  the  cost  of  distribution  by  division  of  territory, 
thereby  avoiding  what  are  called  cross-freights. 
For  instance,  under  a  regime  of  competition,  a 
manufacturer  in  Chicago  might  ship  to  Philadel- 
phia, while  a  rival  factory  in  Philadelphia  would 
be  shipping  to  Chicago.  When  acting  in  unison 
this  waste  is  done  away  with  and  orders  are  filled 
from  the  nearest  factory.  Diminished  cost  in 
freight  charges  is  often  secured  by  shipping  con- 
siderable quantities.  A  large  combination  saves, 
to  a  great  extent,  the  cost  of  advertising  and  the 
wages  of  salesmen.  Further,  it  increases  efficiency 
by  abandoning  inferior  plants  and  discarding  obso- 
lete machinery.  Another  important  advantage  re- 
sults from  the  better  understanding  of  the  market 
which  can  be  gained.  When  there  is  a  multitude 
of  small  establishments,  the  probability  of  over- 
production is  very  much  increased.  .  The  managers 
of  a  large  concern  are  located,  as  it  were,  on  a 
commanding  eminence.  They  can  more  readily 
detect  signs  of  slackening  demand  and  thus  adjust 

27 


CORPORATIONS   AND   THE   STATE 

the  volume  of  the  product  to  changing  condi- 
tions. 

These  same  factors  are  plainly  visible  in  the 
second  class  of  causes,  but  they  are  eclipsed  by 
motives  less  beneficial  to  the  public,  for  in  actual 
experience  the  attainment  of  economy  and  efficiency 
is  not  the  cause  which  has  contributed  most  potently 
to  the  formation  of  combinations.  The  prevailing 
reason  has  been  the  desire  to  eliminate  competition, 
to  fix  prices  by  controlling  output  and  thereby  to 
secure  a  monopoly.  In  the  "Preliminary  Report 
on  Trusts"  made  by  the  Industrial  Commission  some 
ten  years  ago,  it  was  stated  that ' '  Among  the  causes 
which  led  to  the  formation  of  industrial  combina- 
tions, most  of  the  witnesses  were  of  the  opinion 
that  competition  so  vigorous  that  the  profits  of 
nearly  all  competing  establishments  were  de- 
stroyed, is  to  be  given  first  place." 

In  this  desire  for  the  elimination  of  competition 
we  may  detect  the  partiality  for  monopoly  which 
has  always  been  prominent  in  industry  and  trade. 
One  reason  for  the  monopolies  of  the  Middle  Ages 
was  that  those  undertaking  great  enterprises  could 
not  otherwise  make  them  profitable.  The  modern 
captain  of  industry  seeks  the  sole  occupancy  of  the 
field  in  the  same  manner  as  the  English  Trading 
Companies,  but  he  must  secure  it  by  combination 
instead  of  by  obtaining  a  grant  of  exclusive  privi- 
lege from  some  sovereign. 

The  worst  evil  of  existing  combinations  is  over- 
28 


NATURE   OF   COMBINATIONS 

capitalization.  Whenever  a  combination  is  formed, 
it  is  generally  necessary  to  take  in  a  considerable 
number  of  plants — good,  bad,  and  indifferent— and 
allow  for  the  value  of  each  in  the  capitalization  of 
the  new  concern.  But  that  is  not  all.  The  pro- 
moter must  receive  very  generous  compensation, 
and  it  is  well  known  that  some  of  the  largest  legal 
fees  ever  received  have  been  paid  to  lawyers  en- 
gaged to  do  the  legal  work  connected  with  the  in- 
corporation of  new  companies.  As  a  result,  com- 
binations so  organized  must  begin  business  with  an 
inflated  capital. 

Furthermore  the  formation  of  a  combination  often 
partakes  of  the  nature  of  a  stock-jobbing  operation, 
the  aim  being  not  to  facilitate  production  or  to  di- 
minish cost,  but  to  afford  profits  to  promoters  and 
underwriters.  Fraudulent  promotion  and  stock 
watering  were  especially  prominent  during  what 
is  sometimes  called  the  promoters'  period,  from 
1899  to  1904.  During  these  five  years,  combinations 
with  an  aggregate  capitalization  of  several  billions 
were  launched.  The  principal  motive  for  their 
formation  in  numerous  instances  was  to  unload  upon 
the  credulous  public  large  quantities  of  worthless 
securities.  The  sudden  collapse  of  some  of  these 
concerns,  such  as  the  Ship  Building  Trust  and  the 
reorganization  of  others,  is  sufficient  proof  that 
they  were  not  formed  in  response  to  any  legiti- 
mate business  demand. 

The  tendency  toward  combination  is  not  without 
29 


CORPORATIONS   AND   THE   STATE 

its  limitations.  Combinations  do  not  exist  in  all 
branches  of  production,  the  most  notable  exception 
being  that  of  agriculture.  The  art  of  farming,  if 
it  can  be  so  called,  has  shown  a  comparatively  small 
degree  of  modification.  Machinery  has  aided  in 
the  process  of  sowing  and  reaping,  but  in  compari- 
son with  progress  in  manufacturing,  the  advance 
has  been  slight.  The  work  of  manufacturing  has 
been  transferred  from  the  individual  member  of 
the  guild  to  great  aggregations  of  individuals  be- 
cause of  the  revolution  in  industrial  methods  and 
the  utilization  of  capital  in  obtaining  more  economi- 
cal results.  It  is  plain  that  no  such  progress  has 
been  made  in  agriculture.  The  small  farm  affords 
an  opportunity  equal  in  many  respects  to  that  of 
the  large  farm.  The  more  minute  attention  of  the 
individual  farmer  is  one  important  advantage. 
Thus  in  the  history  of  consolidations  we  may  elim- 
inate agricultural  production.  However,  in  carry- 
ing agricultural  products  to  the  market  and  in  pre- 
serving them  for  use,  great  improvements  have 
been  made  by  the  use  of  refrigerator  cars  and  cold- 
storage  plants.  But  this  pertains  to  transportation 
and  to  the  middleman  rather  than  to  the  original 
producer. 

Next  to  agricultural  production,  the  two  branches 
least  affected  by  the  tendency  toward  combination 
are  banking  and  the  mercantile  business.  Espe- 
cially in  the  latter  the  importance  of  the  personal 
element,  the  spirit  of  accommodation  manifested  by 

30 


NATURE   OF   COMBINATIONS 

the  dealer,  his  skill  in  selecting  goods  and  display- 
ing them  for  sale,  all  influence  the  choice  of  many 
buyers  in  making  their  purchases.  Nevertheless, 
in  view  of  the  increasing  cost  of  placing  articles  in 
the  hands  of  consumers,  consolidation  on  a  large 
scale  is  likely  to  develop  in  the  mercantile  business, 
both  wholesale  and  retail.  While  it  must  not  be 
ignored  that  there  has  been  a  considerable  measure 
of  consolidation  in  the  banking  business,  accom- 
plished in  some  cases  by  the  union  of  separate 
banks  under  one  management,  but  more  often 
through  the  connection  of  the  same  directors  with 
numerous  financial  institutions,  the  personal  ele- 
ment, nevertheless,  assumes  very  great  importance. 
The  personal  confidence  reposed  in  the  managers 
has  very  much  to  do  with  the  patronage  of  a  bank- 
ing institution.  It  is  true  that  in  other  countries 
the  tendency  has  been  toward  the  establishment 
of  great  central  institutions,  such  as  the  Bank  of 
France,  which  has  branches  all  over  the  French 
Republic,  and  other  institutions  of  Paris,  which 
have  very  widely  scattered  branches,  some  of  them 
in  other  countries.  In  England,  also,  most  of  the 
banking  business  is  carried  on  by  banks  which  have 
a  central  institution  and  numerous  branches.  But 
the  sentiment  in  our  own  country  has  thus  far  been 
entirely  against  the  branch  banking  system. 

Except  for  the  Sherman  Law,  which  makes  agree- 
ments or  contracts  in  restraint  of  trade  illegal,  the 
Federal  Government  has  not  sought  to  regulate  in- 

31 


CORPORATIONS   AND   THE   STATE 

dustrial  corporations.  A  great  variety  of  state 
laws  exists  for  their  regulation,  some  good  and 
some  bad.  These  will  be  described  in  more  detail 
in  the  following  chapter.  Since  1887,  the  Federal 
Government  has  undertaken  to  regulate  railway 
corporations  with  a  considerable  degree  of  success. 
Legislation,  however,  has  been  faulty  in  not  recog- 
nizing that  the  railroad  corporation  is  a  natural 
monopoly  which  for  this  reason  should  be  dealt  with 
in  a  manner  different  from  industrial  concerns. 
The  Interstate  Commerce  Act  prohibited  pooling, 
and  attempted  to  rely  upon  competition  as  a  regu- 
lating factor,  a  policy  which  experience  has  shown 
to  be  entirely  erroneous. 

The  railway  differs  from  other  forms  of  enter- 
prise in  the  enormous  amount  of  capital  required, 
at  least  for  a  great  railway  system,  and  in  its 
necessary  dependence  upon  the  state.  It  must 
have  important  privileges  and  powers,  such  as  the 
right  of  eminent  domain  and  exceptional  protection 
by  the  police  power.  Furthermore,  the  property 
of  a  railroad  is  of  such  a  nature  that  when  once 
located,  it  cannot  be  transferred  to  another  place. 

The  history  of  improved  transportation  in  the 
United  States  by  railways,  canals,  and  roads,  dis- 
plays a  striking  resemblance  to  the  development  of 
great  industrial  and  commercial  enterprises  from 
their  early  beginnings,  as  portrayed  in  the  pre- 
ceding chapter.  At  first  the  Government  or  the 
states  undertook  the  construction  of  canals  or  im- 

32 


NATURE   OF   COMBINATIONS 

portant  roads.  The  Cumberland  Road,  the  Erie 
Canal,  commenced  in  1817,  and  the  canals  of  Penn- 
sylvania and  Ohio  are  illustrations.  When  con- 
struction was  undertaken  by  the  several  states,  in 
some  instances  assistance  was  rendered  by  the 
Government  in  the  form  of  land  grants.  This  pol- 
icy continued  until  about  the  year  1837,  when  a 
second  period  commenced,  during  which  these 
great  enterprises  were  prosecuted  by  private  com- 
panies, though  they  still  remained  closely  associ- 
ated with  the  state.  In  that  era  large  land  grants 
were  given  by  Congress,  and  very  considerable 
amounts  were  voted  by  communities  and  states  in 
the  form  of  money,  bonds,  or  subventions.  In  re- 
turn the  railroads  receiving  land  grants  agreed  to 
carry  free  the  troops  and  mails  of  the  United  States. 
In  the  case  of  the  Illinois  Central  Railroad  a  con- 
tract was  entered  into  that  a  percentage  of  the 
gross  income  should  be  paid  to  the  State  of  Illinois. 
In  this  second  period  there  was  a  quasi-partner- 
ship  with  the  state,  while  in  the  third  period,  be- 
ginning about  the  year  1870,  the  independent  action 
of  private  enterprise  in  the  building  of  railroads 
was  the  rule.  In  the  first  and  second  periods, 
canals  and  railroads  enjoyed  a  practical  monopoly, 
because  localities  were  often  insufficiently  fur- 
nished with  transportation  facilities  and  the  larger 
share  of  their  business  suffered  no  interference 
from  competition.  Thereafter  lines  were  con- 
structed in  competition  with  those  already  in  ex- 
4  33 


CORPORATIONS  AND  THE  STATE 

istence,  as  illustrated  by  the  West  Shore  which 
paralleled  the  New  York  Central  and  Hudson  River 
Railroad  from  New  York  to  Buffalo,  and  the  New 
York,  Chicago  and  St.  Louis,  which  paralleled  the 
Lake  Shore  and  Michigan  Southern  from  Buffalo 
to  Chicago.  In  this  third  period  also,  the  great 
trunk  lines  were  enlarging  their  systems  by  ab- 
sorbing or  constructing  branch  and  connecting  lines 
to  all  important  terminal  points,  including  those 
already  reached  by  their  rivals.  This  was  another 
factor  in  the  inauguration  of  an  era  of  competition. 
Divers  railway  wars  followed,  many  of  them  of  a 
disastrous  nature,  until  agreements  and  combina- 
tions began  to  appear.  The  desirability  of  avoiding 
competition  and  for  concert  of  action  is  a  distinc- 
tive feature  of  this  later  development  in  railway 
operation  and  management.  Federal  regulation, 
as  by  the  Interstate  Commerce  Law,  was  actuated 
principally  by  the  fear  of  monopolistic  control  of 
railroads. 

Competition  in  railway  management  and  opera- 
tion cannot  have  the  same  salutary  effect  as  in 
other  lines  of  business.  Where  competition  natur- 
ally exists,  an  individual  desiring  some  article, 
can  utilize  the  fact  that  two  or  more  are  engaged 
in  furnishing  what  he  desires,  by  asking  them  to 
bid  against  each  other,  or  from  the  standpoint  of 
the  competing  sellers,  it  is  expected  that  one  will 
fix  a  lower  price  and  give  more  favorable  terms 
than  his  competitor.  But  in  the  case  of  railways, 

34 


NATURE   OF   COMBINATIONS 

legislation  and  popular  opinion  have  forced  them 
to  give  absolutely  equal  terms  to  every  shipper.  It 
is  obligatory  that  the  railroad  should  treat  all  alike. 

The  policy  of  this  country  in  regard  to  railway 
competition  has  caused  many  of  the  evils  of  com- 
bination of  which  we  most  complain.  This  fact  is 
very  clearly  stated  in  the  Report  of  the  Industrial 
Commission,  in  these  words:  "Some of  the  strong- 
est forces  of  combination  have  been  fostered  by 
laws  intended  to  prevent  them."  Very  strict  laws 
have  been  enacted,  compelling  railroads  to  conduct 
their  business  on  a  competitive  basis.  Pools  and 
agreements  have  been  forbidden,  and  the  railroads 
have  been  forced  to  enter  the  competitive  field. 
Under  such  circumstances  they  naturally  seek  the 
patronage  of  the  largest  shippers,  and  in  order  to 
obtain  it  offer  special  favors.  In  the  days  when 
rebates  were  prevalent,  it  was  almost  always  the 
larger  companies  who  received  them  and  were  thus 
able  to  drive  their  competitors  out  of  business.  As 
an  alternative,  smaller  concerns  were  forced  into 
combinations,  so  that  they  might  live.  Thus  the 
same  law-making  power,  which  demanded  that 
there  should  be  no  combinations,  actually  made 
combination  necessary  by  attempting  to  apply  to 
a  natural  monopoly  an  inapplicable  rule.  Regula- 
tion of  the  strictest  kind  is,  of  course,  necessary, 
but  it  is  simply  inevitable  that  competing  railroads 
will  come  to  some  sort  of  an  understanding. 

Mr.  Gladstone,  more  than  sixty  years  ago,  recog- 
35 


CORPORATIONS   AND   THE   STATE 

nized  the  fundamental  principles  relating  to  rail- 
way competition.  When  the  question  of  granting 
a  franchise  to  a  competing  railway  line  to  the 
northwest  of  London  was  under  discussion  in  the 
House  of  Commons,  he  suggested  that  capital  was 
quite  abundant,  and  there  would  be  numerous  re- 
quests of  this  kind,  but  that  he  had  had  enough  ex- 
perience with  railways  to  make  him  feel  assured 
that  it  would  not  do  to  rely  upon  competition  be- 
tween rival  lines  or  upon  competition  cutting  down 
prices  to  the  same  extent  as  in  other  matters.  The 
vastness  of  the  capital  required,  and  the  circum- 
stances of  the  parties  interested,  made  arrange- 
ments between  rival  lines  easy  of  accomplishment. 
Conditions  existing  in  other  lines  of  business  would 
not  result  in  competition  between  railroads,  and 
whether  existing  at  first  or  not,  later  it  would 
cease.  He  quoted  a  remark  by  Mr.  Fox  as  applic- 
able to  rival  railroads — "Breves  inimicitisR  ami- 
citisB  sempiternse. ' '  (Quarrels  are  brief,  friendships 
eternal. ) 

In  view  of  the  exceptional  nature  of  railroad 
property,  all  legislation  preventing  agreements  be- 
tween different  companies,  even  legislation  forbid- 
ding pools,  such  as  was  contained  in  the  Interstate 
Commerce  Act  of  1887,  must  be  regarded  as  a  retro- 
grade step  and  as  tending  to  disarrange  the  natural 
development  of  industry  and  commerce.  We  must 
recognize  the  peculiar  nature  of  railway  property, 
the  different  functions  it  has  to  perform,  and  treat 

36 


NATURE   OF  COMBINATIONS 

it  accordingly.  If  we  do  not,  the  law  against  agree- 
ments will  be  evaded  or  disastrous  results  will  ac- 
crue from  their  prohibition. 

Combination  has  been  carried  farther  in  the 
United  States  than  elsewhere.  Germany  probably 
comes  next  in  this  phase  of  development,  then 
England,  and  fourthly  France.  The  "holding  com- 
pany" seems  to  have  gained  little  foothold  in  any 
of  these  countries  except  England,  though  in  some 
instances  there  have  been  combinations  by  amal- 
gamation. 

The  simplest  form  of  combination  in  Germany  is 
that  under  which  there  is  a  mere  settlement  of  the 
terms  upon  which  business  shall  be  done.  Agree- 
ments as  to  terms  of  credit  granted  are  an  illustra- 
tion of  such  a  settlement.  If  it  had  been  the  cus- 
tom of  some  dealers  to  give  sixty  days,  others 
ninety,  and  some  one  hundred  and  twenty,  they 
come  together  and  agree  upon  a  uniform  time  in 
which  payment  is  to  be  made.  They  sometimes 
agree  upon  the  charges  for  packing  and  delivery, 
and  all  those  incidental  features  which  assume 
considerable  importance  in  the  sale  of  goods. 

The  second  form  is  the  price  association,  the  aim 
of  which  is  to  regulate  the  price  at  which  actual 
sale  is  made,  or  the  article  disposed  of  to  the  con- 
sumer. These  arrangements  are  generally  local, 
though  the  locality  may  cover  a  wide  area  and  em- 
brace a  number  of  branches  of  trade.  They  are  re- 
sorted to  by  persons  engaged  in  producing  and 

37 


CORPORATIONS   AND   THE   STATE 

selling  kindred  commodities,  and  sometimes  in- 
clude both  manufacturers  and  wholesalers,  and  oc- 
casionally wholesalers  and  retailers.  The  usual 
agreement  consists  in  fixing  a  minimum  retail 
price  below  which  goods  cannot  be  sold. 

The  third  form  is  a  limitation  of  the  output. 
Oftentimes  the  cutting  of  prices  below  the  cost 
level  is  due  to  overproduction.  Under  this  form 
a  sale  may  be  made  at  any  price  the  owner  pleases, 
but  the  output  must  be  limited  to  a  certain  amount. 
This  arrangement,  it  will  be  observed,  aims  to  se- 
cure the  same  result  as  the  price  agreement,  but  in 
an  entirely  different  way. 

The  highest  type  of  industrial  organization  in 
Germany  is  known  as  the  cartel,  which  fixes  both 
price  and  output.  A  cartel  is  in  reality  a  highly 
developed  form  of  pool  in  which  the  several  con- 
cerns desiring  to  eliminate  competition  organize  a 
separate  corporation  which  they  control  and  which 
acts  as  a  selling  bureau  for  them.  This  bureau  or 
syndicate,  as  it  is  sometimes  called,  fixes  prices 
and  determines  the  output  of  each  company  and 
usually  manages  the  whole  business  of  selling.  In 
a  pure  cartel  the  producers  organizing  the  bureau 
are  the  exclusive  owners  of  the  stock.  In  some 
others  outside  interests,  such  as  banking-houses, 
may  be  allowed  to  own  some  of  the  stock  and  thus 
have  a  voice  in  the  management.  As  a  rule  cartel 
shares  are  not  transferable  and  never  receive  any 
dividends.  They  simply  represent  voting  power. 

38 


NATURE   OF  COMBINATIONS 

The  respective  concerns  represented  in  the  syndi- 
cate or  cartel  receive  all  the  earnings. 

The  operation  of  the  cartel  is  very  simple.  The 
constituent  members  agree  upon  a  price  for  their 
products  barely  covering  the  cost  of  production. 
Then  they  turn  over  their  output  to  the  syndicate  at 
a  price  usually  somewhat  above  the  base  or  no- 
profit  price.  The  syndicate  sells  the  products  of 
all  to  the  consumer  for  whatever  price  can  be  ob- 
tained in  competition  with  others  in  the  market, 
its  aim  of  course  being  not  to  sell  below  the  price 
at  which  they  were  received.  Control  of  so  large  a 
supply  enables  it  to  maintain  prices.  Whatever 
profits  or  losses  result  are  shared  by  the  concerns 
represented  in  the  organization. 

The  participation  of  the  constituent  members  of 
a  cartel  in  the  total  amount  sold  is  based  upon  their 
productive  capacity  under  competitive  conditions. 
The  total  output  agreed  upon  for  a  given  length  of 
time  is  parceled  out  upon  this  basis,  and  penalties 
are  imposed  for  exceeding  these  specified  amounts. 
All  orders  pass  through  the  selling  bureau  and  are 
allotted  by  it  to  the  respective  members  to  be 
filled  by  them. 

The  cartel  form  of  organization  could  not  exist 
in  the  United  States,  because  the  agreements  fix- 
ing price  and  limiting  output  would  be  illegal  on 
the  ground  that  they  are  in  restraint  of  trade.  In 
Germany  the  selling  bureau  is  a  separate  corpora- 
tion and  has  a  legal  standing  in  court.  The  agree- 

39 


CORPORATIONS  AND   THE   STATE 

ments  made  between  it  and  the  constituent  con- 
cerns and  the  penalties  prescribed  for  violations  of 
these  agreements  are  enforceable  under  the  law. 

The  stability  in  prices  brought  about  by  these 
agreements  is  looked  upon  as  a  public  benefit  and 
accordingly  little  hostility  exists  against  them. 

The  cartel  has  some  advantages  belonging  to  the 
holding  company,  such  as  the  continued  existence 
and  individuality  of  the  constituent  concerns,  but 
it  is  only  a  temporary  organization,  for  the  agree- 
ments, unless  renewed  from  time  to  time,  may  ex- 
pire after  a  few  years  and  the  cartel  be  dissolved. 
Furthermore,  the  cartel  cannot  exercise  as  com- 
plete a  control  over  production  as  the  holding  com- 
pany, because  all  the  constituent  concerns  are  inter- 
ested in  enlarging  their  capacity  and  obtaining  a 
larger  allotment  of  the  total  output.  The  holding 
company  on  the  other  hand  can  shut  down  or  dis- 
mantle certain  factories  if  necessary  in  order  to 
limit  production  while  running  the  others  to  the 
fullest  capacity,  thus  effecting  greater  economy. 
The  greatest  advantage  of  the  cartel  is  that  it 
avoids  the  obloquy  visited  upon  large  combinations. 
It  has  no  capitalization  and  pays  no  dividend, 
although  it  figures  prominently  in  the  public  eye. 
The  constituent  companies,  declaring  their  re- 
spective dividends,  some  high  and  some  low,  are 
sheltered  by  the  syndicate  and  enjoy  the  profits. 

It  is  to  be  noted  that  neither  in  Germany  nor  in 
France  is  the  rule  in  regard  to  contracts  in  re- 

40 


NATURE   OF  COMBINATIONS 

straint  of  trade  enforced  as  in  England  or  in  this 
country.1 

In  France  the  movement  toward  combination  is 
much  less  pronounced  than  in  other  leading  coun- 
tries. This  is  due  to  the  fact  that  most  of  her  in- 
dustries are  not  so  highly  developed  and  have  not 
yet  felt  the  pressure  of  foreign  competition  to  the 
extent  that  those  in  other  countries  have.  Differ- 
ent conditions  exist  in  France  from  those  prevail- 
ing in  the  United  States,  Germany,  and  England. 
There  is  not  the  same  degree  of  aggressiveness  in 
obtaining  trade.  The  exports  of  that  country  con- 
sist largely  of  articles  of  fashion  and  of  special 
products  which  obtain  a  ready  sale  because  of  ex- 
cellence or  novelty.  Another  reason  is  that  the 
Criminal  Code  contains  two  clauses  which  prohibit 
fraudulent  or  monopolistic  attempts  to  control  the 
market.  Section  419  of  this  code  forbids  issuing 
false  statements  to  affect  prices,  and  makes  illegal 
any  association  which  causes  a  rise  or  fall  in  the 

1  In  a  recent  article  regarding  German  bookstores  Profes- 
sor Miinsterberg  argued  that  conditions  there  were  much 
better  for  the  selection  of  books,  because  in  each  town  the 
bookstores  kept  a  large  assortment  from  which  the  pros- 
pective reader  could  choose.  The  main  reason  for  this  in  his 
opinion  was  the  fact  that  a  binding  agreement  as  to  price  ex- 
isted between  all  dealers.  This  enabled  the  small  retailer  to 
compete  with  the  department  stores  on  favorable  terms  and 
maintain  an  assortment  of  books  useful  to  the  community. 
These  agreements  as  to  the  price  of  books  were  considered 
to  be  perfectly  legal  in  contrast  with  the  view  that  our 
courts  have  taken  under  similar  circumstances. 

41 


CORPORATIONS  AND   THE   STATE 

price  of  foodstuffs  or  of  public  securities.  Section 
420  provides  severer  penalties  for  the  manipulation 
of  prices  of  certain  necessaries  of  life,  such  as 
grain,  flour,  bread,  and  wine.  This  law  was  passed 
in  1810,  and  about  1836  it  was  enforced  with  such 
strictness  as  to  forbid  the  consolidation  of  two 
companies  which  operated  stage-coach  lines.  It 
was  held  that  the  law  was  broad  enough  to  make 
criminal  such  a  consolidation.  Later  decisions 
have  mitigated  somewhat  the  harshness  of  the 
rule  thus  laid  down. 

A  law  pointing  in  the  opposite  direction  was 
passed  some  twenty-five  years  ago  and  allowed 
professional  and  other  associations  to  be  formed 
for  mutual  benefit.  Merchants  and  manufacturers 
have  of  late  taken  advantage  of  this  law.  While 
the  ostensible  purpose  of  forming  these  associa- 
tions is  to  study  the  conditions  of  the  trade  and  to 
promote  exports,  there  is  no  doubt  that  in  actual 
operation  they  exercise  a  very  important,  if  not  a 
controlling,  influence  upon  prices.  Amalgamations 
have  occurred  in  some  instances  in  France,  but  the 
central  selling  bureau,  which  fixes  the  allotments 
of  the  constituent  members  and  acts  as  the  agent 
for  all  in  selling  their  goods  is  more  common,  al- 
though by  no  means  carried  as  far  as  in  Germany. 

Of  Great  Britain  it  may  be  said :  (1)  The  same 
general  means  and  methods  of  combination  are 
employed  as  in  the  United  States.  (2)  These 
methods  are  not  resorted  to  in  the  same  degree  of 

42 


NATURE   OF  COMBINATIONS 

magnitude  as  here.  (3)  The  law  is  not  as  strict  in 
regard  to  unlawful  combinations.  Careful  atten- 
tion is  given  to  the  question  in  each  specific  case, 
whether  a  combination  is  deleterious  to  the  public 
welfare  or  not.  For  example,  some  time  ago  a 
suit  was  brought  by  a  shipper  of  tea  from  China 
against  an  association  of  steamship  owners  who  re- 
quired as  a  condition  for  carrying  his  tea  that  he 
would  ship  by  no  other  line,  and  promised  that  if  he 
complied  with  this  requirement  a  rebate  would  be 
allowed  to  him.  He  brought  suit  against  this  asso- 
ciation and  judgment  was  rendered  against  him.1 

The  question  of  the  relative  scope  of  great  com- 
binations in  different  countries  is  further  very  much 
affected  by  the  particular  laws  or  regulations  rela- 
ting to  corporations.  It  seems  to  be  the  opinion  of 
many  that  the  laws  of  a  country  relating  to  busi- 
ness or  to  corporations  come  into  existence  full 
grown,  from  the  brain  of  a  theorist,  or  that  they 
are  drawn  with  a  view  to  expressing  in  legal  terms 
universal  principles  of  trade.  The  real  fact  is  that 
they  are  always  modified  by  circumstances  of  the 
time,  by  physical  conditions,  by  the  status  of  a 
country,  whether  old  or  new,  the  prosperity  of  its 
people,  the  form  of  its  government  and  political 
ideas  concerning  the  relations  of  the  government 
to  the  people.  All  these  varied  influences  have  to 
be  taken  into  account. 

1  Mogul  S.  S.  Co.  v.  McGregor,  (1892)  A.  C.,  25. 
43 


CORPORATIONS  AND   THE   STATE 

Certain  important  influences  are  to  be  noted  in 
Germany.  One  is  the  existence  of  a  paternal  form 
of  government  with  compulsory  military  service 
and  government  ownership  of  railroads.  On  the 
other  hand,  she  is  endeavoring  to  solve  the  problem 
of  material  development,  probably  with  more  skill 
and  ability  than  any  other  government  in  the  world, 
and  is  intelligently  seeking  to  enable  her  citizens 
to  make  the  most  of  the  resources  of  the  country, 
and  to  attain  the  greatest  degree  of  prosperity  pos- 
sible with  the  opportunities  afforded.  The  same 
supervision  of  government  over  private  affairs, 
which  prevailed  in  earlier  times,  still  prevails  in 
considerable  degree  in  Germany.  The  natural  out- 
growth is  legislation  embodying  very  strict  regu- 
lations of  corporations.  Beginning  with  the  forma- 
tion of  a  business  or  commercial  company,  the  law 
provides  that  the  purpose  of  incorporating  must  be 
clearly  shown.  If  the  corporation  is  formed  to  take 
over  tangible  property,  that  property  must  be  care- 
fully appraised.  It  cannot  commence  to  do  business 
until  the  stock  is  subscribed  and  25  per  cent,  paid 
in.  When  a  company  is  formed,  there  is  the  same 
modus  operandi  as  in  an  application  to  a  court. 
The  government  is  represented,  and  there  is  the 
closest  scrutiny  of  the  proposed  organization,  its 
object,  its  management,  and  the  property  that  be- 
longs to  it.  The  articles  of  incorporation  among 
other  things  must  state  for  what  considerations  the 
shares  of  the  company  are  issued  and,  if  not  for 

44 


NATURE   OF   COMBINATIONS 

casn,  then  the  prices  paid  for  property  acquired  and 
the  amounts  paid  for  services  rendered  in  connec- 
tion with  the  promotion  of  the  company. 

Strict  supervision  is  maintained  to  make  certain 
that  the  property  of  the  corporation  is  not  dissi- 
pated, in  order  that  the  stockholders  may  not  lose 
by  reason  of  waste  or  fraud.  Dividends  can  only 
be  paid  out  of  profits,  and  at  least  one-twentieth  of 
the  net  profit  of  each  year  must  go  into  a  reserve 
fund,  until  this  fund  equals  one-tenth  of  the  capi- 
tal stock.  Fullest  publicity  is  required  by  the  Ger- 
man law.  All  reports  are  open  to  public  inspection. 
Stockholders  can  secure  an  examination  of  the 
books,  if  they  so  desire,  and  any  misrepresentation 
on  the  part  of  officers  with  the  intent  to  deceive 
is  a  criminal  offense,  punishable  by  fine  and  im- 
prisonment. 

In  England  the  laws  regarding  the  organization 
of  a  corporation  are  much  less  strict  than  in  Ger- 
many. It  is  not  necessary  that  all  the  stock  be  sub- 
scribed or  paid  in.  There  is  not  the  same  require- 
ment for  maintaining  a  parity  between  the  value 
of  the  property  and  the  stock  subscriptions,  but 
there  must  be  the  fullest  publicity  in  these  particu- 
lars. A  prospectus  displaying  the  affa'irs  of  the 
company  in  full,  must  be  issued  and  filed  where  the 
public  can  have  access  to  it.  Promoters  and  direc- 
tors are  held  strictly  liable  for  the  truthfulness  of 
all  statements  concerning  the  business.  In  pre- 
paring the  annual  statements  after  the  commence- 

45 


CORPORATIONS  AND   THE   STATE 

ment  of  operations,  it  is  customary  to  engage  pro- 
fessional accountants  of  high  standing  to  examine 
the  books  and  report  upon  the  condition  of  the 
company. 

In  France,  as  in  England,  publicity  and  strict  lia- 
bility of  all  officers  are  the  main  features  of  their 
corporation  laws.  The  amount  of  capitalization  is 
not  limited,  but  since  1893  the  par  value  of  shares 
has  been  determined  by  law.  In  the  case  of  limited 
liability  companies,  the  stockholders  can  appoint 
auditors  to  examine  the  books  and  transactions  of 
the  company,  and  they  may  themselves  have  ac- 
cess to  certain  of  the  records  such  as  the  balance 
sheet  and  list  of  stockholders  fifteen  days  before 
the  annual  meeting. 

Now  what  is  the  situation  in  the  United  States  ? 
It  is  probable  that  in  our  own  country  the  privi- 
leges of  the  corporation  are  greater  than  in  any 
country  in  the  world.  More"  serious  excesses  can 
be  perpetrated  and  more  serious  frauds  accom- 
plished than  anywhere  else.  There  is  a  wide  lati- 
tude in  the  powers  which  corporations  may  exer- 
cise. Of  course,  the  laws  of  the  respective  states 
differ  widely,  but  the  general  tendency  is  toward 
laxity  in  governmental  control  and  latitude  in  the 
management  by  officers  of  corporations.  What  is 
the  essential  reason  for  this  condition?  It  is  not 
due  to  the  perversity  of  our  people,  but  to  causes 
plainly  discernible.  We  must  recognize  that  here 
in  the  United  States,  there  is  the  greatest  oppor- 

46 


NATURE   OF  COMBINATIONS 

tunity  for  the  ready  acquisition  of  wealth  on  a 
large  scale  that  has  ever  existed.  We  have  a  vast 
undeveloped  country,  between  the  lesser  and  the 
greater  ocean,  abounding  in  the  treasures  of  the 
farm,  the  forest,  and  the  mine,  far  in  advance  of 
all  other  countries  in  the  mining  of  copper,  well  to 
the  fore  in  silver  and  in  gold,  mining  more  coal 
than  any  other  nation,  and  having  the  greatest 
variety  of  products.  The  humblest  American  shares 
the  general  desire  to  acquire  wealth  just  as  rapidly 
as  possible.  Again,  he  wishes  the  country  to  be 
developed,  because  he  expects  to  obtain  a  part  of 
the  wealth  so  created. 

Thus  corporations  have  been  allowed  a  free  hand 
because  it  was  believed  they  were  the  readiest 
agency  for  the  rapid  development  of  these  great  re- 
sources. Such  is  the  real  reason  for  the  extensive 
privileges  given  to  these  organizations.  The  idea 
has  prevailed  that  no  one  should  stand  in  the  way 
of  any  means  for  increasing  the  wealth  of  the 
country,  and  that  a  corporation  could  develop  and 
make  available  its  resources,  where  individuals 
single-handed  would  fail. 

That  the  time  has  come  when  regulation  is  neces- 
sary in  a  larger  degree  than  before,  I  think  all  who 
have  carefully  considered  this  subject  must  admit. 
Momentous  results  will  undoubtedly  follow  the  re- 
cent decisions  of  the  Supreme  Court  in  the  Trust 
cases,  but  the  disposition  of  the  people  upon  the 
subject  will  be  even  more  important.  That  will 

47 


CORPORATIONS  AND   THE   STATE 

determine  whether  the  great  aggregations  of  pri- 
vate capital  will  be  tolerated  or  destroyed.  It  will 
determine  also  whether  there  will  be  a  growing 
tendency  for  the  state  or  some  political  body  to  take 
over  these  organizations  as  soon  as  they  acquire  a 
controlling  position  in  any  industry.  No  one  can, 
with  any  confidence,  predict  what  the  outcome  will 
be,  but  powerful  forces— social,  political,  and  eco- 
nomic— all  point  toward  combination,  and  these 
forces  have  never  been  so  potent  as  in  the  last 
twenty  years.  Even  though  we  disregard  the 
influence  of  the  promoter  and  the  necessity  of 
combination  to  avoid  competition,  nevertheless, 
economic  tendencies  are  powerfully  at  work,  which 
forecast  future  operations  in  industry  and  com- 
merce on  an  even  larger  scale. 


CHAPTER  III 
THE  REGULATION  OF   CORPORATIONS 

THE  prominence  of  the  corporation  in  our  Amer- 
ican business  life  is  becoming  more  and  more  mani- 
fest each  year.  This  fact  brings  into  clearer  light 
the  necessity  for  more  comprehensive  and  judicious 
regulation  of  corporate  activities  in  the  interest  of 
the  public.  Heretofore  two  factors  have  made 
such  regulation  difficult  of  enactment.  One,  as 
already  stated,  has  been  the  disposition  of  the 
people  to  give  a  free  hand  and  generous  franchises 
to  corporate  managers,  under  the  impression  that 
such  a  policy  would  most  rapidly  promote  the  devel- 
opment of  the  country's  resources  and  thereby 
greatly  increase  individual  wealth.  A  second  rea- 
son is  found  in  the  necessity  for  higher  profits  in 
many  enterprises  than  are  customary  in  more  set- 
tled countries.  Business  ventures  are  more  varied 
and  less  certain  of  profitable  return,  also  rates  of 
interest  and  wages  of  labor  are  higher.  Numer- 
ous enterprises  have  been  undertaken  here  which 
have  proved  exceedingly  successful  as  well  as 
beneficial  to  the  public,  the  capital  for  which  could 
never  have  been  enlisted  by  the  inducement  of 
profits  of  5  or  6  per  cent. 
5  49 


CORPORATIONS  AND  THE  STATE 

It  is  interesting  to  note  that  in  England  a  num- 
ber of  franchises  to  public  service  corporations  have 
been  granted  on  the  condition  that  a  certain  divi- 
dend might  be  paid  when  a  certain  price  was 
charged  the  public.  For  example,  so  long  as  a  gas 
company  in  London  continues  to  charge  two  shil- 
lings and  six  pence  per  thousand  cubic  feet,  a  divi- 
dend of  4  per  cent,  may  be  paid.  If  at  any  time  the 
price  of  gas  is  lowered  to  the  consumer,  the  divi- 
dend may  be  raised,  and  conversely,  if  the  price  is 
raised,  the  rate  of  dividend  must  go  down.  This 
makes  the  interest  of  the  corporation  and  the  pub- 
lic one;  for  if  the  public  gains  a  benefit  in  the  way 
of  lower  prices,  the  corporation  may  reap  a  benefit 
in  the  way  of  higher  dividends.  A  franchise  pro- 
viding that  if  the  price  be  lowered  the  dividend 
may  be  raised  has  recently  been  granted  in  Massa- 
chusetts, but  conditions  are  not  yet  ripe  in  our 
country  for  the  application  of  such  a  principle  on 
any  large  scale ;  there  is  not  that  abundance  of  capi- 
tal and  not  that  assured  success  of  enterprise  which 
makes  such  arrangements  possible.  The  gas  con- 
sumption in  London  can  be  computed  with  excep- 
tional accuracy,  also  the  cost  of  coke  and  other  ex- 
penses of  manufacture,  and  thus  the  profits  can  be 
ascertained  with  reasonable  certainty.  There  have 
been  instances  in  this  country  in  the  case  of  public 
service  corporations,  such  as  street  railway  com- 
panies, where,  when  the  franchises  were  about  to 
expire,  an  adjustment  of  a  somewhat  similar  nature 

50 


REGULATION   OF  CORPORATIONS 

has  been  made,  whereby  it  was  provided  that  the 
franchise  would  be  extended  for  twenty  or  twenty- 
five  years,  or  whatever  the  term  might  be,  pro- 
vided the  stock  of  the  corporation,  as  determined 
by  an  appraised  valuation,  should  not  pay  more 
than  6  per  cent.  Such  an  arrangement  is  now  in 
force  in  the  city  of  Cleveland.  The  street  railway 
company  starts  with  a  charge  of  three  cents  for  a 
fare,  and  one  cent  for  a  transfer,  with  a  provision 
that  this  rate  may  be  raised  provided  the  corpora- 
tion cannot  pay  6  per  cent,  on  that  basis.  If,  on 
the  other  hand,  a  larger  return  than  6  per  cent,  is 
obtained,  the  fare  is  to  be  reduced,  the  first  item 
of  reduction  being  the  one  cent  for  transfers.1 

Another  obstacle  to  regulation  in  the  United 
States  is  the  confusion  and  competition  caused  by 
our  system  of  government,  under  which  forty-six 
states  and  two  territories  grant  the  privilege  of  in- 
corporation, under  widely  different  statutory  pro- 
visions. In  many  cases  the  whole  or  greater  part 
of  a  corporation's  business  is  carried  on,  not  in  the 
states  where  the  franchise  is  granted,  but  in  other 
states  of  the  Union.  The  results  of  this  are  inev- 
itable. Different  states  vie  with  each  other  to  in- 
fluence prospective  companies  to  take  out  their 
letters  of  incorporation  from  them.  In  this  com- 
petition the  tendency  is  to  grant  more  and  more 

1  In  accordance  with  this  arrangement,  the  one  cent 
charge  for  transfers  is  now  being  refunded  when  transfers 
are  presented. 

51 


CORPORATIONS  AND   THE  STATE 

liberal  franchises.  It  is  easy  to  predict  what  per- 
sons desiring  to  secure  corporate  powers  will  do. 
If  they  cannot  obtain  the  desired  privileges  in 
Pennsylvania,  they  will  seek  to  obtain  them  across 
the  Delaware,  or  in  some  other  state  where  even 
greater  advantages  are  offered. 

In  a  little  pamphlet  entitled  "The  Advantages 
of  Incorporation,"  Mr.  Frank  A.  North  says, 
"The  laws  of  New  York,  as  do  those  of  Massachu- 
setts, require  measures  which  are  very  desirable 
from  the  standpoint  of  the  creditor  or  assessor,  but 
are  not  relished  by  the  stockholder. ' '  An  official  of 
the  Province  of  Quebec,  thus  expressed  himself  in 
the  New  York  Tribune:  "In  case  of  the  development 
of  drastic  antitrust  legislation  in  the  United  States, 
to  go  to  Quebec  will  be  perhaps  the  only  solution 
for  many  of  the  large  industrial  combinations  in 
the  United  States."  A  prominent  Boston  news- 
paper a  few  years  ago  contained  the  following  ad- 
vertisement: "This  Beats  New  Jersey — Charters 
procured  under  South  Dakota  laws  for  a  few  dol- 
lars." Now  it  is  evident  that  this  competition 
between  states,  and  the  complications  which  are 
caused  by  it,  is  one  of  the  very  worst  features  of 
the  situation.  In  this  connection  it  will  be  instruc- 
tive to  survey  briefly  the  principal  regulations  of 
our  state  laws  governing  corporations. 

The  first  class  of  regulations  pertains  to  the 
manner  of  incorporation.  Three  different  methods 
have  been  employed.  The  one  formerly  most  in 

52 


REGULATION   OF  CORPORATIONS 

use  was  to  pass  a  special  act  of  the  legislature 
incorporating  the  prospective  company,  and  defin- 
ing its  privileges.  It  was  discovered  that  this 
course  led  to  log-rolling  and  favoritism,  and  inter- 
posed unnecessary  obstacles,  so  that  it  was  gradu- 
ally dropped  and  now  is  but  seldom  employed. 
The  second  method,  now  most  commonly  found  on 
the  statute  books  of  the  states,  is  by  a  general 
law,  under  which  a  certain  number  of  persons, 
usually  not  less  than  five,  may  file  articles  of  incor- 
poration, giving  the  name,  the  object,  and  the 
capital  stock.  Under  this  plan  there  are  notable 
differences  in  the  requirements  of  the  various 
states,  especially  in  the  incorporation  of  railways. 
For  instance,  one  state  provides  that  a  railway 
company  may  incorporate  by  filing  a  statement 
giving  the  following  data:  (1)  The  names  of  the 
incorporators,  a  majority  of  whom  shall  be  resi- 
dents of  the  state ;  (2)  the  name  of  the  corporation, 
which  shall  begin  with  the  word  "The"  and  end 
with  the  word  "Company";  (3)  the  approximate 
location  of  the  railway  or  its  projected  route  and  the 
proposed  capital  stock.  Five  men,  under  such  a 
rule,  could  file  articles  with  the  proper  official,  giv- 
ing the  name  of  their  corporation,  the  proposed 
capitalization,  which  in  some  states  is  a  matter  of 
indifference,  and  demand  the  privilege  of  eminent 
domain,  that  is,  the  right  to  condemn  property. 

In  other  states  the  statutes  provide  that  the 
application  of  the  proposed  company  must  be  re- 

53 


CORPORATIONS  AND   THE  STATE 

ferred  to  a  board  of  engineers,  or  other  officers, 
who  shall  first  pass  upon  the  necessity  and  desira- 
bility of  such  a  railway.  The  extent  to  which  the 
building  of  railways  has  been  restricted,  is  well 
illustrated  by  the  English  law,  under  which  dia- 
grams must  be  filed,  showing  the  exact  route— 
although  some  variation  is  permitted — just  what 
property  will  be  taken,  the  width  of  the  right  of 
way,  and  a  detailed  statement  of  various  other 
conditions.  A  special  bill  must  be  introduced  in 
Parliament.  In  the  meantime  any  one  interested 
can  object.  This  illustrates  the  wide  extremes  in 
the  giving  of  privileges  for  building  railways  and 
much  the  same  variety  of  regulations  appears  in 
organizing  the  business  of  other  companies. 

A  third  method  of  incorporation  requires  applica- 
tion to  a  court  and  a  statement  of  the  reason  for 
the  existence  of  the  proposed  corporation.  Only 
one  state  in  the  Union,  that  of  Georgia,  now  em- 
ploys this  method.  It  resembles  closely  the  Ger- 
man practice  under  which  application  must  be 
made  to  a  tribunal  of  commerce,  and  all  the  facts 
made  known  regarding  the  proposed  capital,  as 
well  as  the  work  to  be  done  by  the  corporation,  and 
the  objects  to  be  attained. 

The  next  class  of  regulations  relates  to  stock 
subscriptions  and  the  conduct  of  incorporators  and 
promoters.  Here  again  there  are  three  methods  in 
vogue.  The  first  is  that  under  which  the  incor- 
porators are  the  judges  of  the  value  of  the  property 

54 


REGULATION   OF  CORPORATIONS 

to  be  conveyed  to  the  corporation  in  payment  for 
stock,  the  state  having  no  responsibility  therein, 
except  to  enforce  liability  for  fraudulent  action. 
This  is  the  more  generally  accepted  theory  in  this 
country.  So  limited  a  regulation  renders  it  diffi- 
cult to  prevent  investment  in  shares  based  upon 
fictitious  values,  and  the  opportunities  for  fraudu- 
lent practices  are  unlimited. 

The  second  theory  or  plan  provides  that  the 
issuance  of  stock  shall  be  controlled  and  limited  by 
the  state.  This  is  the  policy  adopted  in  Germany. 
It  rests  upon  the  idea  that  the  state  in  granting 
franchises  has  certain  responsibilities,  and  must 
therefore  prevent  the  sale  of  shares  to  the  investor 
at  inflated  values.  In  hardly  any  other  country  is 
that  rule  enforced  with  the  same  strictness  as  in 
Germany,  though  there  is  decided  progress  else- 
where toward  requiring  the  full  amount  of  the 
capital  stock  to  be  paid  in. 

The  third  theory  is  that  incorporators  may  capi- 
talize at  any  amount  they  desire,  provided  no  stock 
shall  be  issued  until  a  statement  is  prepared,  show- 
ing the  amount  of  stock  to  be  issued,  and  the  con- 
ditions under  which  it  is  to  be  purchased  by  in- 
vestors. On  this  theory  stockholders  deal  with  the 
corporation  at  their  own  risk,  the  state  guarantee- 
ing the  ready  procurement  of  reliable  information. 
The  second  method  has  been  styled  one  of  paternal- 
ism, and  the  third  one  of  publicity. 

State  laws  regarding  the  capitalization  of  cor- 
55 


CORPORATIONS  AND  THE  STATE 

porations  differ  widely.  In  Iowa  all  companies 
proposing  to  issue  stock  for  money  must  report 
plans  to  the  executive  council  of  the  state  for  ap- 
proval. In  Massachusetts  the  issuance  of  stock 
must  subsequently  be  approved  by  the  commis- 
sioner of  corporations,  and  a  certificate  with  his 
indorsement  thereon  must  be  filed  with  the  Secre- 
tary of  the  Commonwealth.  In  Montana  stock 
may  be  issued  for  the  consideration  of  money, 
labor,  services,  or  property.  In  the  case  of  mines 
any  arbitrary  value  may  be  placed  upon  the  prop- 
erty, so  as  to  make  the  stock  issued  therefor  fully 
paid,  regardless  of  its  actual  value.  In  Utah  the 
incorporators  must  describe  the  property  that  is 
taken  in  payment  for  stock,  and  certify  that  it  is 
reasonably  worth  in  cash  the  amount  for  which  it 
is  to  be  accepted  by  the  corporation. 

Another  class  of  regulations  pertains  to  increase 
of  capitalization  after  the  company  begins  to  do 
business.  About  the  same  degree  of  laxity  and  in- 
difference is  manifested  in  this  regard  as  in  the 
original  issue  of  stock,  so  that  here  again  there  is 
a  most  dangerous  opportunity  for  fraud. 

In  many  cases  the  methods  employed  for  the  in- 
crease of  capitalization  are  identical  with  those 
adopted  for  original  issues  of  stock,  as  for  example 
payment  in  services  or  in  property.  On  the  one 
hand  there  is  a  restraining  influence  upon  the  crea- 
tion of  fictitious  stock  due  to  the  desire  of  existing 
stockholders  to  prevent  the  depreciation  of  their 

56 


REGULATION  OF  CORPORATIONS 

holdings,  though  this  factor  is  sometimes  rendered 
ineffective  by  the  fraudulent  action  of  the  owners 
of  a  controlling  interest  in  the  corporation.  On  the 
other  hand  inflated  capitalization  is  made  easy  by 
the  readiness  with  which  imaginary  or  anticipated 
profits  of  a  going  concern  may  be  made  the  basis 
for  increasing  the  capital  under  the  guise  of  a  stock 
dividend. 

Another  regulation  which  should  be  considered  in 
this  connection  relates  to  the  payment  of  dividends. 

A  greater  degree  of  strictness  has  been  observed 
in  this  regard  than  in  the  original  issuance  of  stock 
or  in  the  increase  of  capitalization  after  organiza- 
tion. In  Colorado,  no  dividend  can  be  declared 
when  the  corporation  is  insolvent  or  when  it  would 
diminish  the  capital  stock,  and  directors  and  officers 
become  personally  liable  for  debts  of  the  corpora- 
tion then  existing  or  afterward  incurred.  Thus  no 
dividends  can  be  paid  except  from  net  profits.  In 
Florida,  if  the  directors  knowingly  declare  a  divi- 
dend when  the  company  is  insolvent,  they  are 
liable.  Idaho,  Connecticut,  and  Maine  have  similar 
laws.  In  a  majority  of  the  states,  if  a  director 
votes  against  a  dividend  declared  in  violation  of 
the  law,  he  may  protect  himself  from  liability  by 
causing  his  vote  to  be  entered  on  the  minutes. 
Some  states  require  him  to  file  his  objection  with 
a  county  officer. 

The  powers  granted  to  corporations  in  many 
states  are  manifestly  too  broad.  The  earlier  idea 

57 


CORPORATIONS  AND   THE   STATE 

was  to  restrict  the  corporation  to  a  particular  branch 
of  business.  Some  later  charters  grant  them  the 
right  to  engage  in  almost  every  branch  of  business, 
such  as  manufacturing,  building,  construction  of 
railroads,  banking,  maintenance  of  retail  stores,  in 
which  is  included  so-called  company  stores  for  the 
sale  of  articles  to  employees.  The  general  tendency 
to  broad  powers  is  hazardous,  in  the  first  place  from 
the  standpoint  of  the  enterprise  itself.  It  has  been 
regarded  as  unwise  to  give  the  same  bank  the  right 
to  act  as  a  trust  company,  to  receive  long  time  de- 
posits and  lend  money  on  mortgages,  and  to  con- 
duct a  commercial  banking  business,  all  in  one. 
Whenever  there  is  imposed  upon  the  same  manager 
or  board  of  directors  a  multiplicity  of  duties,  the 
danger  always  exists  that  they  will  not  be  per- 
formed properly.  Furthermore  the  corporation 
may  fail  because  of  the  diversity  of  its  activities. 
It  also  gives  to  a  large  concern  an  exceptional  hold 
upon  some  branch  of  business  and  sometimes  aids 
it  to  become  a  monopoly. 

State  laws  also  show  a  very  wide  variety  of  reg- 
ulations regarding  publicity,  which  may  be  viewed 
from  two  or  three  standpoints :  (1)  From  the  stand- 
point of  the  stockholders,  (2)  from  that  of  the 
creditor,  and  (3)  from  that  of  the  public  at  large. 
The  interests  of  the  stockholder  and  creditor  are 
usually  identical.  The  subject  which  has  received 
more  attention  from  legislatures  and  courts  than 
any  other,  is  the  opportunity  of  minority  stock- 

58 


REGULATION  OF  CORPORATIONS 

holders  to  inspect  the  books  and  statements.  By 
the  common  law,  this  right  of  inspection  belonged 
to  the  minority  stockholder,  though  there  were  de- 
cisions to  the  effect  that  it  must  be  exercised  for 
a  reasonable  purpose.  There  have  been  numerous 
statutes  on  this  subject,  and  quite  a  number  of 
divergent  decisions  in  the  courts  of  the  United 
States,  but  the  general  tendency  has  been  to  give 
to  the  stockholder  this  right  in  ample  measure.  It 
is  alleged,  and  no  doubt  there  are  illustrations  to 
show,  that  in  some  instances  a  man  has  bought  a 
single  share  of  stock  in  a  corporation  and  then  has 
presented  himself  to  inspect  its  books  for  the  pur- 
pose of  securing  information  with  which  to  injure 
the  business  or  aid  a  competitor.  This,  however, 
should  be  regarded  as  an  exceptional  case,  not 
affecting  the  general  rules  to  be  adopted. 

The  main  argument  for  publicity  is  that  the 
stockholder,  the  creditor,  and  the  public  should 
know  what  the  corporation  is  doing.  The  stock- 
holder and  creditor  should  know  whether  its  busi- 
ness is  profitable  or  not,  whether  assets  are  being 
wasted,  or  whether  they  are  being  conserved.  The 
public  should  know  whether  it  is  exceeding  its 
powers,  or  earning  inordinate  profits.  On  the  other 
hand,  it  is  alleged  with  unusual  earnestness,  especi- 
ally by  those  in  the  smaller  corporations,  that  while 
publicity  for  the  benefit  of  the  stockholder  and 
creditor  is  not  open  to  objection,  inspection  by  the 
public  at  large  does  more  harm  than  good,  because 

59 


CORPORATIONS  AND   THE  STATE 

it  enables  persons  to  learn  where  generous  profits 
are  being  made  and  to  enter  into  competition.  As 
an  illustration,  the  Payne-Aldrich  Tariff  Bill  im- 
poses a  tax  upon  the  net  earnings  of  corporations. 
The  most  vigorous  objection  to  this  bill  was  not  to 
the  amount  of  the  tax.  Many  corporate  managers 
said,  "We  can  stand  that,  but  we  do  not  wish  to 
have  our  business  known  to  the  public,"  and  the 
matter  was  adjusted  so  that  the  returns  are  filed 
with  the  Commissioner  of  Internal  Revenue,  and 
are  open  for  inspection  only  to  government  officials, 
to  enable  them  to  ascertain  the  amount  of  the  tax, 
and  incidentally  to  determine  the  good  faith  of 
the  persons  making  the  report. 

The  manifest  tendency,  however,  is  toward 
greater  publicity,  and  it  should  be  borne  in  mind 
that  if  a  corporation  is  receiving  abnormal  profits, 
it  is  but  fair  to  the  public  that  this  should  be  known. 
If  profits  are  due  to  unusual  ability,  to  care  and 
skill,  that  is  one  thing;  if  they  are  due  to  the  posses- 
sion of  monopoly  privileges,  or  to  oppression  and 
exaction,  that  is  another.  In  any  event  it  would 
seem  that  the  public  is  entitled  to  know  whether 
corporations  are  being  conducted  in  accordance  with 
the  requirements  of  law.  This  is  certainly  true  in 
the  case  of  the  great  corporations  carrying  on  busi- 
ness on  a  large  scale  and  coming  in  close  touch  with 
the  needs  of  the  people  in  the  production  of  the 
necessaries  of  life.  When  the  regime  of  publicity 
was  introduced  in  Germany  in  1884,  fear  was  ex- 

60 


REGULATION   OF  CORPORATIONS 

pressed  that  the  business  of  corporations  would  be 
destroyed  and  their  stockholders  ruined  if  the  de- 
tails of  their  earnings  and  general  condition  were 
made  public.  But  time  has  proven  that  these  grave 
apprehensions  were  groundless. 

The  recommendations  of  the  Industrial  Commis- 
sion regarding  publicity  are  worthy  of  mention  at 
this  point.  The  first  two  relate  to  the  requirements 
respecting  promoters.  They  would  require  pro- 
moters to  furnish  investors  with  full  details  as  to 
conditions  under  which  stock  is  issued,  and  would 
hold  them  liable  for  damages  where  the  prospectus 
failed  to  make  full  declarations.  They  recommend 
that  the  names  of  the  directors  and  officers  be 
furnished  any  investor  desiring  them.  So  much 
refers  to  formation.  As  regards  management  they 
would  require :  (a)  reasonably  detailed  financial  re- 
ports to  stockholders  at  least  once  a  year,  verified 
by  an  auditor,  (b)  information  to  the  stockholders 
of  the  business  condition,  by  granting  proper  ac- 
cess to  the  records  of  directors'  meetings,  (c)  a  list 
of  members,  their  addresses  and  holdings,  for  the 
use  of  members  before  the  annual  meeting.  A  num- 
ber of  state  statutes  are  in  accord  with  this  rec- 
ommendation. The  Industrial  Commission  would 
also  compel  the  large  corporations,  the  so-called 
trusts,  to  file  a  financial  report  in  reasonable  de- 
tail, issued  under  the  inspection  of  the  government, 
and  showing  assets  and  liabilities,  with  profit  and 
loss.  This  report  is  intended  for  the  public  at  large. 

61 


CORPORATIONS  AND   THE  STATE 

In  the  case  of  ordinary  corporations,  the  Commis- 
sion would  only  require  that  a  reasonably  detailed 
report  shall  be  issued  to  stockholders,  thus  making 
a  distinction  between  smaller  companies  and  the 
trusts. 

The  general  trend  both  of  legislation  and  corpor- 
ate management  is  decidedly  in  the  direction  of 
promoting  a  greater  degree  of  publicity.  It  is  a 
very  common  rule  that  an  annual  statement  must 
be  made  at  the  meetings  of  the  stockholders,  and 
frequently  it  must  be  examined  by  the  officers  and 
also  by  supervisors,  or  by  certified  accountants,  as 
in  Great  Britain,  or  by  a  committee,  as  in  some  of 
the  states.  But  improvement  in  the  management 
of  corporations  must  in  large  degree  depend  upon 
higher  standards  [of  business  morality.  Reform  of 
corporations  cannot  be  fully  accomplished  by  the 
mere  enactment  of  statutes  to  prevent  fraud  and 
dishonesty.  There  must  be  a  more  general  observ- 
ance of  honesty  and  fair  dealing.  The  exactions 
which  have  been  perpetrated,  and  the  unfair  ad- 
vantages gained,  are  largely  the  result  of  the  com- 
mercial ideals  of  the  time.  Where  success  is  wor- 
shiped, even  those  possessing  the  highest  moral 
standards  submit  with  nonchalance  to  the  disregard 
of  law  and  common  honesty,  as  if  they  thought  the 
guilty  ones  had  developed  the  highest  type  of  acu- 
men and  ingenuity.  Complete  reform  will  come, 
not  with  the  adoption  of  more  perfect  legislation, 
but  when  the  general  public,  the  average  citizen, 

62 


REGULATION   OF  CORPORATIONS 

realizes  that  the  possession  of  limited  means  is  to 
be  preferred  to  wealth,  unless  obtained  honestly. 

It  must  be  clear  to  any  one  who  has  given  this 
subject  thorough  examination  that  corporations 
have  outgrown  state  boundaries.  The  spectacle  of 
one  state  in  the  Union  granting  extensive  powers 
to  corporations  to  do  business  in  all  the  other  states, 
and  with  foreign  countries,  is  manifestly  incongru- 
ous. In  their  rivalry  to  attract  as  many  corpora- 
tions as  possible  for  the  sake  of  revenue,  some  states 
will  yield  to  the  insistent  demands  of  those  inter- 
ested in  securing  favorable  franchises.  Powerful 
corporations  can  also  influence  state  legislatures 
more  easily  than  they  could  the  administrative 
branches  of  the  Federal  Government  or  the  Federal 
Legislature. 

Several  plans  have  been  suggested  to  overcome 
this  inadequacy  of  state  control.  The  first  is  to 
continue  the  present  dual  arrangement,  as  it  may 
be  called,  between  the  general  government  and  the 
states.  The  second  is  to  transfer  to  the  Federal 
Government  the  exclusive  control  of  corporations 
engaged  in  interstate  commerce,  so  far  as  it  can  be 
given.  Of  course,  the  only  power  the  government 
has  in  this  regard  is  derived  from  the  clause 
authorizing  the  regulation  of  commerce  between 
the  states,  with  the  Indian  tribes  and  with  foreign 
nations.  The  government  has  no  power  to  enforce 
criminal  law,  except  in  punishment  of  offences 
against  its  own  laws,  but  it  does  have  the  right  ab- 

63 


CORPORATIONS   AND   THE   STATE 

solutely  to  control  commerce  between  the  states, 
and  as  was  stated  by  Justice  Bradley  in  a  decision,1 
' '  As  regards  commerce  between  the  states  the  whole 
Union  is  as  one  country.  There  exists  the  right  to 
regulate,  the  right  to  control,  and  the  right  to  con- 
trol the  agents  and  instrumentalities  of  commerce. " 

Public  welfare  would  not  be  benefited  by  taking 
away  these  powers  from  the  Federal  Government, 
and  conferring  them  upon  the  respective  states, 
and  there  is  doubt  whether  such  a  transfer  of 
these  powers  could  be  made.  But,  be  that  as  it 
may,  it  would  not  be  desirable,  not  alone  on  account 
of  the  inefficiency  of  state  governments,  which  has 
been  very  much  in  evidence,  but  because  of  the 
complications  which  would  result  from  giving  to 
forty-six  or  forty-eight  different  units  the  control  of 
that  which  is  becoming  each  year  more  and  more  one 
great  united  field  of  activity.  The  states  of  this 
Union  are  as  near  together  to-day  as  the  counties 
were  in  the  time  of  Thomas  Jefferson,  and  the  time 
when  our  Constitution  was  formed.  This  is  due 
to  the  modern  means  of  communication,  and  the 
ease  and  rapidity  with  which  we  pass  from  state 
to  state. 

Three  general  plans  of  federal  control  have  been 
proposed:  Federal  licensing,  voluntary  federal  in- 
corporation, and  compulsory  federal  incorporation. 
The  first  two  plans  merit  serious  consideration, 

1  See  also  9  Wheaton,  196,  and  32  Federal  Reporter,  p.  17. 
64 


REGULATION   OF  CORPORATIONS 

but  the  plan  of  compelling  all  companies  engaged 
in  interstate  trade  to  incorporate  with  the  Federal 
Government,  is  much  too  revolutionary  to  meet  with 
general  approbation  at  this  time.  Even  the  changes 
wrought  by  either  of  the  other  two  plans  are  so 
great  as  to  arouse  strenuous  opposition.  But  there 
should  be  no  cause  for  alarm  in  this  extension 
of  the  powers  of  the  central  government,  for  even 
if  interstate  business  is  to  be  taken  under  federal 
control,  that  step  does  not  mean  that  we  are  to 
wipe  out  state  lines  or  do  away  with  the  separate 
activities  of  the  states.  It  merely  means  that  in- 
asmuch as  commerce  is  fast  becoming  such  a 
nation-wide  affair,  control  of  that  field  of  activity 
should  be  taken  over  by  the  Federal  Government. 

The  complaint  that  the  government  is  assuming 
too  much  power  cannot  at  least  consistently  be 
made  by  those  citizens  of  the  respective  states, 
counties,  and  cities  who  continually  call  upon  the 
Federal  Government  to  do  what  they  ought  to  do 
themselves.  If  we  assume  the  regulation  of  the 
railways  that  run  from  Illinois  to  Texas,  or  from 
Pennsylvania  to  the  Gulf,  that  does  not  mean  that 
minor  matters  inside  the  states  are  to  be  taken 
over  by  the  central  government.  It  does  not  mean 
the  drainage  of  lands  in  Florida,  or  the  purchase 
of  forest  reserves  in  New  Hampshire,  but  only 
that  the  central  authority  must  increase  its 
powers  so  far  as  new  conditions  may  demand. 
Such  a  condition  is  presented  by  this  great  prob- 
6  65 


CORPORATIONS  AND  THE   STATE 

lem  of  commerce  which  knows  no  state  lines  or 
boundaries,  and  whose  operations  extend  through- 
out the  whole  country. 

In  choosing  between  the  two  plans  of  federal 
licensing  or  federal  incorporation  the  question  of 
practical  application  assumes  special  importance. 

The  former  in  a  general  way  would  prohibit  all 
corporations  from  engaging  in  interstate  business 
unless  they  obtained  a  license  from  the  Federal 
Government.  As  a  condition  of  issuing  these 
licenses,  certain  regulations  would  be  imposed  with 
a  view  to  correcting  existing  evils.  Under  the 
latter  or  federal  incorporation  plan,  a  company 
would  receive  its  charter  containing  the  desired 
regulations  directly  from  the  central  government. 
Accordingly  the  latter  avoids  the  confusion  and 
uncertainty  arising  from  conflict  between  the  fed- 
eral and  state  authorities  which  would  inevitably 
occur,  under  the  license  plan.  The  attempt  of  a 
corporation  retaining  a  state  charter  and  amenable 
to  state  laws  to  comply  with  the  conflicting  require- 
ments of  a  federal  license  would  be  futile  and 
would  inevitably  result  in  endless  legal  difficulties. 
Suppose  the  federal  license  prohibited  the  inter- 
holding  of  shares  or  some  of  the  other  privileges 
which  a  New  Jersey  charter  permits,  what  is  the 
corporation  to  do?  In  brief,  under  a  licensing  sys- 
tem either  the  present  objectionable  features  which 
appear  in  state  regulations  must  be  retained,  at 
least  in  part,  or  they  must  be  superseded  by  uni- 

66 


REGULATION   OF  CORPORATIONS 

form  regulations  under  national  control.  In  the 
former  case  the  licensing  system  would  be  ineffect- 
ive. In  the  latter,  there  would  be  so  slight  a  dis- 
tinction between  the  results  attained  by  licensing 
and  national  incorporation  that  it  would  be  quite 
as  well  to  adopt  the  incorporation  plan. 

All  difficulties  of  a  practical  nature  would  be 
obviated  by  the  federal  incorporation  plan.  Cor- 
porations having  federal  charters  would  be  respon- 
sible to  the  rules  and  regulations  of  but  one  author- 
ity. Of  course,  some  minor  difficulties  would  arise 
such  as  the  necessity  for  abolishing  franchise  taxes 
and  the  resulting  loss  of  revenue  to  the  states,  but 
the  advantages  to  be  gained  by  having  all  com- 
panies with  federal  charters  subject  only  to  one 
uniform  federal  law  rather  than  to  the  diverse  and 
conflicting  laws  of  forty-six  states  cannot  be  mini- 
mized. The  adoption  of  this  plan  will  permit  cor- 
porations to  do  business  in  any  state  without  injury 
to  the  rights  of  other  states  and  without  injury  to 
the  rights  of  any  individual. 

The  first  application  of  the  rule  of  national 
incorporation  would  naturally  be  to  interstate 
railways,  and  next  to  the  great  industrial  corpora- 
tions, whether  engaged  in  manufacturing  or  trade, 
whose  transactions  extend  through  many  states. 
There  are  very  palpable  reasons  of  an  exceptional 
nature  why  a  railway  extending  through  five  or  six 
different  states  should  be  incorporated  under  na- 
tional law.  It  is  an  agency  of  interstate  commerce 

67 


CORPORATIONS   AND   THE   STATE 

over  which  Congress  has  the  power  of  regulation, 
and  may  exercise  the  sole  power  of  regulation  if  it 
so  desires.  Inequality  is  sure  to  arise  through  un- 
equal taxation  or  unequal  rates  in  the  different 
states.  One  state  or  city  can  claim  a  privilege  for 
itself  which  is  an  injustice  to  all  the  rest.1  Sup- 
pose a  railroad  runs  from  Washington  to  New 
Orleans,  and  two  or  three  states  on  the  way  force 
down  the  local  rates — that  is  the  intrastate  rates 
— to  a  figure  that  would  be  confiscatory  if  applied 
on  the  whole  road.  The  result  can  readily  be  seen. 
If  there  is  a  non-remunerative  charge  in  one  state 
for  services  rendered,  the  railroad  must  recoup  in 
other  states,  so  that  it  is  impossible  to  consider  it 
as  subject  to  the  control  of  any  one  state.  It  be- 
longs to  them  all.  Doubt  has  been  expressed 
whether  by  any  plan  of  national  incorporation  you 
can  do  away  with  the  right  of  a  state  to  regulate 
rates  or  exercise  police  powers  within  its  own  bor- 
ders. However,  a  decision  has  recently  been  ren- 
dered in  Minnesota,  which  seems  to  go  far  toward 
establishing  the  rule  that  the  Federal  Government 
may  intervene  in  such  a  case,  notwithstanding  the 

1 A  good  illustration  is  furnished  by  a  certain  railway 
from  New  York  to  the  West.  A  dispute  arose  between  the 
railway  managers  and  a  municipality,  because  the  road  did 
not  erect  a  more  commodious  railroad  station.  The  city 
council  passed  an  ordinance  providing  that  the  speed  of  all 
trains  through  the  city  limits  must  not  exceed  eight  miles  an 
hour,  and  this  caused  a  delay  of  twenty  minutes  in  an  impor- 
tant through  train  intended  to  make  the  most  rapid  speed. 

68 


REGULATION  OF  CORPORATIONS 

fact  that  the  rate  charged  is  entirely  between  points 
within  one  state.1  If  these  rates  were  confiscatory, 
the  right  to  intervene  would  undoubtedly  exist. 

In  January,  1910,  President  Taft  sent  to  Con- 
gress a  special  message,  recommending  among  other 
things  the  plan  of  federal  incorporation  for  com- 
panies engaged  in  interstate  commerce.  In  Febru- 
ary of  the  same  year  a  bill,  drafted  by  the  Attor- 
ney-General and  embodying  the  recommendations 
of  the  President,  was  introduced  in  the  Senate  and 
referred  to  the  Committee  on  the  Judiciary.  Pend- 
ing the  decisions  of  the  Supreme  Court  in  the  trust 
cases,  this  measure  was  not  pressed  and  no  action 
has  thus  far  been  taken  on  it,  nor  is  there  proba- 
bility of  its  passage  in  the  near  future. 

The  essential  provisions  of  this  bill  are  worthy  of 
mention.  Section  1  provides  that  any  five  or  more 
persons  may  form  a  corporation  to  engage  in  com- 
merce with  foreign  nations,  between  states  or 
within  a  state.  Among  the  powers  granted  in  Sec- 
tion 5,  is  the  right  to  produce  or  manufacture  in 
any  state,  territory,  or  district,  articles  or  com- 
modities which  relate  to  interstate  or  foreign  com- 
merce. The  constitutionality  of  a  federal  statute 
granting  to  a  corporation  the  right  to  manufacture 
in  any  state  has  never  been  definitely  settled.  The 

1  This  view  was  sustained  by  the  Circuit  Court  of  Appeals 
for  the  seventh  district  in  an  opinion  rendered  by  Judge  San- 
born  in  April,  1911.  Shephard  v.  Northern  Pac.  Ry.  Co., 
Federal  Reporter,  vol.  184,  p.  765. 

69 


CORPORATIONS   AND   THE   STATE 

presumption  is  certainly  in  favor  of  this  right  where 
the  whole  or  a  part  of  the  product  is  intended  for 
interstate  or  foreign  trade.  Section  7  provides  for 
cumulative  voting.  Each  stockholder  is  entitled  to 
one  vote  for  each  share,  multiplied  by  the  number 
of  directors  to  be  elected,  and  is  permitted  to  cast 
all  his  votes  for  any  one  or  more  of  the  directors. 

One  of  the  most  important  provisions  of  this 
measure,  is  that  contained  in  Section  8,  which  pro- 
hibits all  corporations  organized  pursuant  to  the 
act  from  purchasing,  acquiring,  or  holding  stock  in 
any  other  corporation.  This  absolutely  forbids  the 
formation  of  holding  companies.  Section  17  con- 
tains a  provision  to  the  effect  that  when  property 
is  furnished  for  stock  subscriptions  in  place  of  cash, 
it  shall  be  valued  in  such  a  way  as  to  prevent  fraud. 
The  Commissioner  of  Corporations  may  appoint  one 
or  more  persons  to  make  a  valuation  of  such  prop- 
erty, and  fix  a  compensation  which  shall  be  paid 
for  it,  and  no  stock  shall  have  a  par  value  in  excess 
of  the  value  of  said  property,  as  proved  to  the  Com- 
missioner of  Corporations.  There  is  also  a  provi- 
sion in  the  same  section  that  the  burden  of  proof, 
if  any  one  is  defrauded  by  false  statements  of  any 
director,  is  on  the  corporation,  which  must  show 
that  the  one  so  deceived  or  misled  did  not  rely 
upon  such  statements. 

The  directors  of  corporations  are  prohibited  by 
Section  23  from  declaring  dividends,  except  from 
net  profits,  nor  shall  they  withdraw  any  part  of  the 

70 


REGULATION   OF   CORPORATIONS 

capital  stock  of  the  corporations  or  reduce  the  capi- 
tal stock,  except  as  authorized  by  law.  There  is 
also  a  provision  in  Section  27,  that  the  stockholders 
of  corporations  shall  be  jointly  and  severally  liable 
for  wages  due  to  employees  other  than  directors, 
for  services  performed.  Whenever  any  corporation 
shall  fail  to  pay  off  written  obligations  or  an  exe- 
cution shall  be  returned  unsatisfied,  the  Commis- 
sioner of  Corporations  is  empowered  by  Section  31 
to  appoint  a  special  agent,  df  whose  appointment 
notice  shall  be  given  to  the  corporation,  who  shall 
proceed  to  ascertain  whether  the  corporation  is  in 
unsound  financial  condition,  and  the  Commissioner 
of  Corporations  may  exercise  the  power  of  appoint- 
ing a  receiver  to  take  charge  of  it. 

These  briefly  are  some  of  the  more  important  pro- 
visions of  the  administration  measure.  While  they 
are  not  so  comprehensive  as  those  of  the  German 
law,  yet  if  adopted  they  will  go  far  toward  elimi- 
nating the  evils  of  corporate  organization  and  man- 
agement. If  this  plan  prevails,  it  will  present  a 
most  difficult  problem  in  administration,  and  can 
only  be  attended  with  success  if  the  administrative 
branch  having  charge  of  its  enforcement  is  charac- 
terized by  ability  and  impartiality. 


CHAPTER  IV 

BANKING  CORPORATIONS— STATE    AND   FEDERAL 
—OUR   MONETARY   SYSTEM 

THE  distinctive  feature  of  the  laws  and  regula- 
tions relating  to  banking  corporations,  as  compared 
with  those  pertaining  to  other  corporations,  is  the 
greater  severity  of  the  former.  This  statement, 
strictly  speaking,  refers  only  to  the  federal  laws 
pertaining  to  national  banks;  nevertheless,  from 
year  to  year  a  greater  degree  of  supervision  is  be- 
ing applied  to  organizations  under  state  laws  and 
state  control.  There  are  manifest  reasons  for  this 
distinction,  based  upon  weighty  considerations  of 
public  policy.  No  failure  causes  so  much  injury  to 
the  general  public  as  that  of  a  bank.  There  are 
hundreds  of  banks  in  the  United  States,  having 
more  than  fifty  thousand  depositors.  One  bank  in 
Philadelphia  has  more  than  250,000  depositors. 
Confidence  in  their  stability  is  essential ;  they  are 
the  centers  of  financial  operations  in  the  communi- 
ties in  which  they  are  located.  The  failure  of  a 
single  one  of  them  creates  widespread  havoc  and 
loss,  not  only  to  depositors,  but  to  all  business 
interests. 

From  the  standpoint  of  national  or  state  control, 
72 


BANKING   CORPORATIONS 

the  history  of  banking  institutions  in  the  United 
States  may  be  divided  into  two  periods.  The  first 
commences  with  the  Bank  of  North  America,  es- 
tablished in  the  city  of  Philadelphia  in  1781,  and 
extends  to  the  year  1863,  when  the  law  providing 
for  the  organization  of  national  banks  was  passed. 
During  this  first  period,  from  1781  to  1863,  with 
one  exception,  all  banks  were  organized  under 
state  laws,  and  were  under  the  control  of  state 
authorities.  The  single  exception  was  the  United 
States  Bank,  also  located  at  Philadelphia.  It  was 
first  chartered  in  1791,  for  a  period  of  twenty 
years,  and  again  in  1816,  for  another  twenty  years. 
The  central  office  was  at  Philadelphia,  but  there 
were  numerous  branches  located  in  the  various 
states  of  the  Union. 

This  first  period  of  our  banking  history  was 
characterized  by  a  great  degree  of  laxity  and  favor- 
itism, and  the  same  lack  of  uniformity  in  banking 
regulations  among  the  different  states  which  is  now 
manifest  in  the  laws  relating  to  other  corporations. 
For  fifty  years  after  1781,  banks  were  established 
under  special  charters,  and  the  granting  of  a  char- 
ter was  often  the  result  of  political  favor.  Antag- 
onism between  the  Federalist  and  Republican  par- 
ties in  the  state  of  New  York  was  never  more 
bitter  than  in  the  controversies  over  the  chartering* 
of  banks.  This  privilege  was  regarded  as  one  of 
great  value,  and  was  given  to  prominent  men  or 
leaders  of  the  one  party  or  the  other.  Another 

73 


CORPORATIONS   AND  THE   STATE 

characteristic  feature  of  the  banks  in  this  term  of 
fifty  years  was  that  in  most  cases  the  state  itself 
insisted  upon  subscribing  for  part  of  the  stock.  A 
prominent  reason  for  this  was  the  expectation  of 
large  profits  in  the  banking  business.  Again,  a 
share  in  their  management  was  desired.  It  was 
believed  that  if  the  state  held  a  part  of  the  stock 
and  shared  in  the  management,  a  greater  degree 
of  consideration  would  be  given  when  public  loans 
were  needed.  The  United  States  held  one-fifth  of 
the  ten  millions  of  stock  of  the  first  United  States 
Bank,  and  an  equal  proportion  of  the  capital  of  its 
successor. 

A  serious  danger  during  all  these  years  arose 
from  permission  to  pay  stock  subscriptions  in  notes, 
and  the  absence  of  any  effective  requirement  for 
their  collection.  Thus  banks  would  begin  to  do 
business  without  adequate  resources  and  without 
that  stability  which  should  characterize  financial 
institutions.  Bank  statements  and  the  filing  of 
accounts  were  not  required.  Much  stress  was  laid 
upon  the  note-issuing  feature.  Indeed,  many  of 
the  banks  were  organized  not  for  deposit  banking, 
nor  for  loans  to  the  commercial  communities  in 
which  they  were  located,  but  for  the  privilege  of 
issuing  circulating  notes.  This  was  the  most 
potent  cause  of  the  scandals  and  failures  which 
characterized  the  state  banking  system  in  the  years 
preceding  the  Civil  War. 

Two  general  plans  for  the  security  of  notes  and 
74 


BANKING   CORPORATIONS 

obligations  were  adopted.  One  was  the  so-called 
safety-fund  system  in  the  state  of  New  York, 
under  which  each  bank  issuing  notes  was  com- 
pelled to  pay  an  annual  subscription  of  one-half  of 
one  per  cent,  of  its  capital  until  the  total  amount 
of  the  fund  so  accumulated  should  be  3  per  cent, 
of  their  total  capital.  In  case  any  one  of  them 
should  fail,  this  fund  was  applied  to  the  payment 
of  the  claims  of  its  note-holders,  depositors,  and 
creditors,  and  in  case  the  fund  should  at  any  time 
fall  below  3  per  cent,  of  the  aggregate  capital  of  all 
the  banks,  a  further  assessment  was  levied  with  a 
view  to  maintaining  that  amount.  This  plan  did 
not  prove  successful.  Its  fundamental  defect  was 
that  too  much  was  attempted.  The  safety  fund 
should  have  been  applied  first  to  the  payment  of 
circulating  notes,  and  afterward  to  deposits.  In 
every  well-regulated  banking  system,  there  is  a 
clear  distinction  between  general  banking  obliga- 
tions, and  those  obligations  which  it  assumes  by 
issuing  bills  or  circulating  notes.  The  depositors 
are  supposed  to  have  some  knowledge  of  the  stand- 
ing of  the  institution,  while  persons  taking  its  bills 
may  be  a  hundred  or  a  thousand  miles  distant. 
Circulating  notes  are  naturally  accepted  with  the 
supposition  that  they  carry  absolute  security. 

The  second  system  or  plan  for  the  security  of 
circulating  notes  was  tried  in  a  greater  number  of 
states,  and  furnished  an  example  for  the  note-issu- 
ing privilege  under  the  national  banking  system. 

75 


CORPORATIONS   AND   THE   STATE 

Under  it  the  bank  issuing  bills  deposited  state 
bonds  or  securities,  or  in  some  cases  mortgage 
notes,  with  some  public  officer,  and  with  the 
privilege  of  issuing  bills  to  an  amount  not  greater 
than  the  aggregate  par  value  of  such  securities. 
This  plan  was  also  unsuccessful.  Oftentimes  the 
bonds  proved  worthless,  and  with  imperfect  super- 
vision and  regulation,  unscrupulous  manipulation 
was  rendered  possible.  The  term  "  wildcat"  was 
applied  to  banks,  because  in  many  instances  they 
issued  notes  payable  at  some  very  remote  place, 
often  in  thinly  settled  or  wild  localities. 

A  former  Secretary  of  the  Treasury,  still  living, 
appeared  a  few  years  since  before  the  Committee 
on  Banking  and  Currency  of  the  House  of  Repre- 
sentatives, and  related  several  almost  dramatic  ex- 
periences incurred  while  undertaking  to  obtain  the 
redemption  of  notes  of  banks  in  this  class.  He 
found  a  threatening  atmosphere.  It  was  intimated 
that  he  would  suffer  injury,  unless  he  departed 
without  enforcing  payment  of  the  bills  which  he 
brought.  A  popular  sentiment  prevailed  that  those 
who  held  the  circulating  notes  ought  to  pass  them 
from  hand  to  hand,  and  that  the  request  for 
redemption  was  a  hardship  upon  the  bank  and 
even  upon  the  community  in  which  it  was  located. 

There  was  a  third  method  or  plan  of  regulating 
note  issues  under  which  banks  were  allowed  to 
issue  bills  in  proportion  to  the  amount  of  their 
capital,  the  limit  being  fixed  in  some  instances  at 

76 


BANKING   CORPORATIONS 

three  times  their  capital.  It  is  easy  to  recognize 
that  under  these  various  systems,  defective  in 
themselves,  and  without  adequate  supervision, 
there  were  almost  unlimited  possibilities  for  fraud 
and  dishonesty,  so  that  the  methods  of  issuing 
notes  which  prevailed  at  that  time  inevitably  led 
to  a  great  amount  of  confusion  and  loss. 

Another  serious  objection  to  note  issues  prior  to 
the  Civil  War  was  the  danger  of  counterfeits. 
Hundreds  of  banks  issued  notes,  and  it  was  practi- 
cally impossible  for  any  bank  cashier  to  be  certain 
of  the  genuineness  of  all  the  bills  presented.  The 
poor  workmanship  upon  genuine  bills  offered  an 
added  temptation  for  counterfeiting,  so  that  even 
if  they  were  genuine,  those  to  whom  they  were 
offered  were  reluctant  to  accept  them. 

Mr.  McKinley  used  to  relate  a  story  to  the  effect 
that  Horace  Greeley  once  delivered  a  lecture  in  the 
Middle  West,  for  which  payment  was  offered  in 
bills  of  a  great  variety.  In  looking  them  over  he 
remarked,  "Haven't  you  a  few  well  executed  coun- 
terfeits that  you  can  give  me  in  place  of  these 
bills?" 

In  the  face  of  such  inconvenience  and  danger  of 
loss  as  prevailed,  it  was  natural  that  means  should 
be  sought  to  remedy  these  conditions.  The  most 
notable  instance  was  "The  Suffolk  Banking  Sys- 
tem," which  was  established  in  the  year  1813. 
The  Suffolk  Bank  at  Boston  undertook  to  act  as  a 
Clearing  House  for  the  bills  of  all  the  banks  of 

77 


CORPORATIONS   AND   THE   STATE 

New  England.  This  institution  contracted  with 
various  banks  that  upon  the  deposit  at  its  office  of 
$5,000,  it  would  redeem  the  notes  of  the  depositing 
institution  at  its  counter  in  Boston  with  the  under- 
standing, of  course,  that  when  the  deposit  fell 
below  $5,000,  the  amount  should  be  made  good. 
This  system  placed  the  currency  of  New  England 
upon  a  much  better  footing  than  that  of  other  sec- 
tions. In  some  states,  however,  such  as  Louisiana, 
Tennessee,  and  Indiana,  banks  were  organized 
under  strict  rules  requiring  the  prompt  redemption 
of  bills  in  gold  as  they  were  presented. 

These  conditions  as  above  described,  had  a  most 
important  influence  upon  the  adoption  of  the  Na- 
tional Banking  System  in  1863,  along  lines  first 
recommended  by  Hon.  Salmon  P.  Chase,  Secre- 
tary of  the  Treasury  in  1861.  Senator  Sherman 
was  the  leading  advocate  of  this  system  in  Con- 
gress, and  was  in  great  measure  entitled  to  the 
credit  for  its  adoption  and  later  development.  The 
greatest  gain  accomplished  by  this  reform  was  uni- 
formity— uniformity  not  only  in  the  regulation  of 
note  issues,  but  in  the  rules  governing  deposits 
and  the  management  of  banks. 

The  following  are  among  the  most  essential 
regulations  which  distinguish  national  banks  from 
the  state  banks  which  preceded  them : 

Fifty  per  cent,  of  stock  subscriptions  must  be 
paid  before  the  bank  begins  to  do  business,  and 
the  remaining  50  per  cent,  in  monthly  instalments 

78 


BANKING   CORPORATIONS 

of  10  per  cent.  each.  The  banks  are  limited  for 
the  most  part  to  discounting  notes.  No  loans  on 
real  estate  are  permitted.  The  original  law  of  1863 
permitted  mortgage  loans,  but  an  amendment  in 
1864  forbade  them.  The  next  provision,  that  not 
more  than  10  per  cent,  of  the  capital  and  surplus 
shall  be  loaned  to  any  one  individual  or  corpora- 
tion, is  a  very  salutary  one.  It  prevents  the  em- 
barrassment of  a  bank  by  the  failure  of  a  single 
debtor.  Instances  have  occurred  where  the  fail- 
ure of  a  state  bank  disclosed  the  fact  that  60  per 
cent,  of  the  capital  had  been  loaned  to  one  corpora- 
tion, the  insolvency  of  which  caused  the  bank  to 
close  its  doors. 

The  act  further  provides  that  capital  must  not  be 
impaired,  nor  can  dividends  be  paid  from  capital. 
One-tenth  of  the  net  profits  must  be  carried  to  sur- 
plus, until  the  surplus  equals  20  per  cent,  of  the 
capital.  National  banks  cannot  loan  upon  their 
own  stock.  Against  deposits  a  reserve  is  required 
amounting  to  25  per  cent,  in  reserve  cities,  thirty- 
one  in  number,  and  15  per  cent,  in  other  cities. 
Twenty-eight  of  the  thirty-one  reserve  cities,  how- 
ever, have  the  right  to  maintain  one-half  of  their 
required  reserve  in  the  three  central  reserve  cities, 
and  the  country  banks  may  maintain  three-fifths  of 
their  required  reserve  in  a  reserve  city.  Originally 
the  same  reserve  was  required  upon  circulating 
notes  issued  by  national  banks,  but  that  provision 

was  repealed. 

79 


CORPORATIONS   AND   THE   STATE 

In  one  important  feature  our  regulations  of 
national  banks  are  much  in  advance  of  those  of 
Europe.  They  must  file  with  the  Comptroller  of 
the  Currency  not  less  than  five  reports  per  annum, 
and  the  Comptroller  can  call  for  statements  at  any 
time.  Frequent  examinations  of  the  assets  and 
general  condition  are  made  by  expert  examiners, 
who  oftentimes  give  helpful  suggestions,  and  are 
authorized  to  take  possession  of  the  bank  accounts 
and  money,  all  the  notes  and  assets  of  the  bank,  in 
order  to  make  themselves  familiar  with  its  condi- 
tion and  assure  themselves  of  its  solvency. 

The  question  of  the  constitutionality  of  the 
National  Banking  Act  was  much  discussed  in  1862 
and  1863.  Three  or  four  arguments  were  presented 
in  the  affirmative  at  the  time,  some  of  which  are  the 
same  as  those  in  favor  of  the  incorporation  of  the 
old  United  States  Bank.  An  argument  of  un- 
doubted validity  for  the  establishment  of  the  na- 
tional banks  is  their  utility  as  a  fiscal  agent  or 
instrument  of  the  federal  treasury  in  facilitating 
the  collection  of  public  dues  and  in  making  dis- 
bursement for  the  payment  of  public  obligations. 
The  reason  uppermost  in  the  minds  of  its  framers, 
however,  was  that  the  national  banks  would  afford 
assistance  to  the  government  in  floating  its  bonds. 
The  original  statute  provided  that  each  national 
bank  should  buy  bonds  of  the  United  States  to  the 
amount  of  one-third  of  its  capital,  that  is,  if  the 
capital  was  $1,500,000,  $500,000  must  be  invested 

80 


BANKING   CORPORATIONS 

in  United  States  bonds.  This  law  has  been  amended 
so  that  a  less  amount  is  now  required.  The  rule 
now  is  that  in  banks  with  a  capital  of  $150,000  or 
less,  one-fourth  must  be  invested  in  United  States 
bonds,  and  above  $150,000  of  capital,  a  fixed  amount 
of  $50, 000  is  required.  On  these  bonds  the  national 
banks  were  at  first  authorized  to  issue  circulating 
notes  up  to  90  per  cent,  of  the  par  value  of  the 
bonds.  The  federal  treasury  is  responsible,  both 
directly  and  indirectly,  for  their  note  issues. 

When  bills  are  presented  to  the  Treasurer  of  the 
United  States,  they  must  be  redeemed  in  United 
States  notes,  and  the  banks  in  turn  must  reimburse 
the  Treasury,  and  provide  a  reserve  of  5  per  cent, 
for  their  entire  circulation.  Of  course,  the  ulti- 
mate security  for  the  payment  of  these  bills  is  the 
deposit  of  United  States  bonds  at  the  National 
Treasury.  In  1900  the  law  was  changed,  so  that 
the  privilege  of  issuing  90  per  cent,  of  the  par  value 
of  the  bonds  was  enlarged  to  100  per  cent.  There 
is  a  tax  of  one-half  of  one  per  cent,  per  annum, 
payable  semi-annually  on  circulation  that  is  secured 
by  bonds  drawing  2  per  cent.,  and  a  tax  of  1  per 
cent,  on  bonds  drawing  more  than  2  per  cent.  In 
the  year  1865,  a  law  was  passed  imposing  an  annual 
tax  of  10  per  cent,  on  the  circulation  of  state  banks. 
This  resulted  very  shortly  in  the  withdrawal  of 
their  circulation. 

The  degree  in  which  the  business  of  a  country 
adjusts  itself  to  its  banking  system,  whatever  it 
7  81 


CORPORATIONS   AND   THE  STATE 

may  be,  is  not  generally  realized.  France  and  Eng- 
land have  widely  different  banking  systems,  especi- 
ally as  regards  note  issue,  but  in  both  countries 
alike,  the  transactions  of  commerce  and  industry 
seem  to  have  adjusted  themselves  to  the  respective 
banking  methods  in  vogue,  so  that  an  equal  degree 
of  stability  and  convenience  is  attained.  But  in 
our  own  country,  conditions  are  so  different,  that  it 
would  be  impossible,  or  practically  impossible,  for 
any  of  these  foreign  banking  systems  to  serve  as  a 
model. 

The  banking  system  of  the  United  States  differs 
essentially  from  that  of  leading  European  coun- 
tries in  that  there  is  no  central  bank  closely  con- 
nected with  the  state.  Neither  has  the  privilege 
of  note-issue  been  abandoned  by  our  government 
and  concentrated  in  a  central  institution,  as  has 
been  the  case  in  most  of  these  countries. 

The  concentration  of  note  issues  in  Europe  em- 
phasizes the  mongrel  character  of  our  currency. 
First  we  have  the  greenbacks  issued  by  the  govern- 
ment, beginning  in  1862.  The  policy  of  issuing 
these  notes  based  on  the  credit  of  the  United  States 
has  been  much  criticised.  Many  have  stated  that 
the  war  might  have  been  financed  without  them. 
In  fairness  it  must  be  said  that  at  that  time  there 
was  a  greatly  increased  demand  for  money,  and  our 
monetary  system  was  entirely  inadequate.  There 
was  nothing  to  pay  the  army,  nothing  to  pay  con- 
tractors. There  was  no  supply  of  specie  on  which 

82 


BANKING   CORPORATIONS 

to  base  a  proper  issue  of  money.  To  meet  the 
exigencies  of  the  time,  these  notes,  based  on  the 
credit  of  the  United  States  Government,  were  issued 
with  the  result  that  in  a  short  time  gold  rose  to  a 
premium.  In  July,  1864,  $100  of  gold  was  worth 
$285  in  greenbacks.  The  premium  on  gold  con- 
tinued until  the  resumption  of  specie  payment  in 
1879.  For  almost  seventeen  years  we  had  a  paper 
currency  exclusively,  barring  subsidiary  coinage, 
and  even  that  was  in  circulation  for  only  part  of 
the  time.  In  1878,  the  amount  of  greenbacks  was 
fixed  at  $346, 681, 016.  It  was  determined  by  statute 
that  the  amount  should  be  neither  increased  above 
nor  diminished  below  that  sum.  Accordingly  we 
still  have  these  greenbacks  in  circulation  resting 
upon  the  credit  of  the  government. 

It  is  not  necessary  to  describe  in  detail  all  the 
different  kinds  of  currency.  We  have  the  national 
bank-notes  issued  against  government  bonds,  the 
amount  of  which  is  approximately  $726,000,000. 
Then  we  have  the  silver  dollar  or  silver  certificate. 

The  silver  dollar  was  accepted  as  unlimited  legal 
tender,  until  the  year  1873,  but  under  the  legal 
ratio  of  sixteen  ounces  of  silver  to  one  of  gold,  the 
metal  in  a  silver  dollar  was  worth  more  than  that 
in  a  gold  dollar,  and  as  a  result  silver  dollars  went 
out  of  circulation  and  into  the  melting-pot 

In  1873,  an  act  was  passed,  sometimes  called  the 
"Crime  of  '73,"  which  discontinued  the  coinage  of 
silver  dollars.  The  facts  show  that  there  was  no 

83 


CORPORATIONS   AND   THE   STATE 

scheme  or  trick  in  the  passage  of  that  law,  as  is 
sometimes  claimed.  It  was  merely  the  recognition 
of  existing  conditions.  Immediately  afterward 
great  silver  mines  were  opened  in  Nevada,  and 
there  began  an  agitation,  one  of  the  most  bitter  in 
our  history,  for  the  remonetization  of  silver  on  the 
basis  of  sixteen  to  one.  The  Bland-Allison  Act 
was  passed  in  1878,  providing  that  not  less  than 
$2,000,000,  nor  more  than  $4, 000, 000  worth  of  silver 
was  to  be  purchased  each  month,  and  coined  into 
silver  dollars.  The  advocates  of  silver  were  not 
satisfied,  however,  and  in  1890  another  law,  known 
as  the  Silver  Purchase  Act,  was  passed,  under 
which  4,500,000  ounces  of  silver  per  month  were  to 
be  purchased  and  retained  in  the  Treasury,  and 
warrants  equal  to  the  cost  of  the  metal  were  to  be 
issued  as  currency.  That  is,  if  the  government 
purchased  $3,000,000  worth  of  silver  in  a  month, 
silver  purchase  notes  to  that  amount  were  to  be 
put  into  circulation.  This  act  was  repealed  in  1893. 
About  the  year  1900  the  great  mass  of  silver  in 
the  vaults  of  the  Treasury  in  the  form  of  silver 
bullion  impressed  legislators  with  the  desirability  of 
retiring  the  silver  purchase  notes  and  coining 
the  bullion  on  which  they  were  based;  so  it  was 
gradually  converted  into  silver  dollars,  amounting, 
with  other  coinage,  to  about  $564, 000, 000.  For  the 
most  part,  silver  dollars  are  now  represented  by 
certificates.  Thus  when  a  certificate  for  five  dollars 
is  issued,  five  silver  dollars  will  be  retained  in 

84 


BANKING   CORPORATIONS 

the  Treasury  to  redeem  it.  Finally  we  have  gold 
coins,  the  amount  of  which  increases  or  decreases 
with  the  gold  coinage  and  foreign  exchanges,  and 
the  gold  certificates,  which  are  issued  by  the  United 
States  Treasury  in  exchange  for  deposits  of  gold 
ccin  or  bullion. 

Two  of  these  five  varieties  of  currency  just 
enumerated,  the  greenbacks  and  silver,  amounting 
in  all  to  about  $900,000,000  are  invariable  in  amount. 
The  national  bank  notes,  though  subject  to  change, 
do  not  respond  to  business  demands.  Gold,  as 
already  stated,  is  increased  or  decreased  as  it  comes 
in  or  goes  out  of  the  country,  or  according  to  the 
amount  mined  and  coined.  The  possible  variation 
in  the  volume  of  gold  and  bank  notes  does  not  give 
sufficient  elasticity  to  the  quantity  of  money  in 
circulation.  In  this  fact  lies  the  chief  defect  in 
our  currency  system. 

The  currency  system  of  England  is,  in  a  way, 
more  rigid  than  ours.  Practically  all  circulating 
notes  are  issued  by  the  Bank  of  England.  A  few 
banks  still  have  this  privilege,  but  they  are  becom- 
ing less  in  number,  and  the  amount  issued  by  them 
smaller.  Two  kinds  of  notes  are  issued  by  the 
Bank  of  England.  First  those  based  on  govern- 
ment and  other  valid  securities,  amounting  to  about 
18,000,000  pounds  or  $90,000,000,  which  as  regards 
security  are  practically  the  same  as  our  national 
bank  notes,  being  issued  against  an  obligation  of 
the  government  or  one  of  like  nature.  Second, 

85 


CORPORATIONS  AND   THE  STATE 

in  addition  to  these  $90,000,000,  the  Issue  Depart- 
ment of  the  Bank  of  England  puts  out  notes  which 
must  be  represented  by  and  based  upon  gold.  The 
amount  of  this  second  class  of  bills  varies  from 
month  to  month,  but  averages  about  $170,000,000, 
and  rarely  exceeds  $200,000,000.  The  lowest  de- 
nomination of  the  Bank  of  England  notes  is  five 
pounds.  The  result  is  that  a  large  amount  of  gold 
is  in  circulation  in  the  form  of  sovereigns  and  half- 
sovereigns  of  a  value  slightly  less  than  $5  and  $2. 50, 
respectively,  while  for  smaller  payments  silver  and 
token  coins  are  used.  The  most  common  silver 
coins  are  the  half-crown,  the  florin,  or  two  shilling 
piece,  the  shilling,  and  the  sixpence  pieces,  equiv- 
alent, respectively,  to  a  little  less  than  62J  cents, 
50  cents,  25  cents,  and  12|  cents. 

There  is  no  opportunity  for  elasticity  in  the  cur- 
rency of  England,  so  far  as  note  issue  is  concerned. 
The  amount  secured  by  the  government  debt  is 
practically  the  same  always,  and  the  other  issues 
depend  upon  the  quantity  of  gold  or  gold  bullion  in 
the  Issuing  Department  of  the  bank.  The  reason 
for  stringent  regulations  restricting  the  issuance 
of  currency  to  notes  based  upon  securities  or  gold, 
is  to  be  found  in  the  theories  prevalent  at  the  time 
when  the  Bank  Act  was  adopted  in  1844.  Sir  Robert 
Peel,  the  Prime  Minister,  took  the  position  that  the 
bank  ought  not  to  issue  bills  beyond  the  stipulated 
limit,  even  though  it  promptly  redeemed  them  over 
its  counter,  because  otherwise  speculation  would  be 

86 


BANKING   CORPORATIONS 

stimulated  and  the  probabilities  of  panic  increased. 
The  evils  of  an  inelastic  currency  are  less  notice- 
able in  England,  partly  because  of  the  greater  use 
of  checks  and  instruments  of  exchange  and  partly 
because  the  holding  of  very  large  credits  abroad 
makes  it  possible  to  accumulate  gold  on  short 
notice.  Both  these  factors  are  powerfully  rein- 
forced by  the  immediate  inflow  of  gold  which  re- 
sults from  the  custom  of  raising  the  rate  of  dis- 
count of  the  Bank  of  England,  a  step  always  taken 
in  time  of  stress. 

The  note  issues  of  the  Bank  of  France  are  based 
upon  a  very  different  theory.  There  is  no  require- 
ment that  every  note  shall  be  represented  by  coin 
or  other  security,  but  it  is  the  rule  that  whenever 
one  of  its  notes  is  presented,  it  must  be  redeemed 
in  coin.  The  maximum  amount  that  can  be  issued 
is  $1, 160, 000, 000.  The  present  amount  outstanding 
is  $900,000,000,  and  a  reserve  of  gold  and  silver 
of  about  three-quarters  of  that  amount  is  main- 
tained. The  Bank  of  England  cannot  issue  a  note 
in  addition  to  the  limited  amount  based  upon  gov- 
ernment security  unless  it  has  the  gold  in  its  vaults. 
The  Bank  of  France  can  issue  its  notes  irrespective 
of  the  reserves  of  gold  and  silver  it  has  in  its 
coffers,  but  must  redeem  the  notes  in  coin  when- 
ever presented. 

The  Reichsbank,  or  Imperial  Bank  of  Germany, 
has  the  privilege  of  issuing  circulating  notes  to  a 
fixed  amount  sustained  by  an  ample  reserve,  in 

87 


CORPORATIONS   AND   THE   STATE 

addition  to  which  further  notes  may  be  put  in  cir- 
culation, provided  one-third  of  the  additional 
amount  issued  is  represented  by  money  in  the 
vaults,  and  the  remaining  two-thirds  by  commer- 
cial paper  of  good  character.  But  it  must  pay  to 
the  government  a  5  per  cent,  tax  upon  this  sup- 
plemental issue.  This  plan  is  very  much  criticised 
in  England,  on  the  ground  that  it  affords  an  undue 
liberty  in  the  issuance  of  notes. 

The  capital  stock  of  the  Bank  of  England  is  held 
by  private  individuals,  and  while  the  management 
is  in  close  touch  with  the  government,  the  direc- 
tors are  chosen  by  the  stockholders.  The  bank  is 
the  fiscal  agent  of  the  government,  receiving  and 
disbursing  its  deposits. 

The  governor  and  two  deputy  governors  of  the 
Bank  of  France  are  appointed  by  the  government, 
and  the  stockholders  choose  the  remaining  direc- 
tors. All  the  directors  of  the  Bank  of  Germany 
are  selected  by  the  government,  but  there  is  a  sort 
of  supervisory  board  chosen  by  the  stockholders. 

An  important  difference  between  the  European 
banks  and  our  own  is  found  in  the  number  of 
branches.  While  our  state  banks  frequently  have 
branches,  no  national  bank  does.  The  Bank  of 
England  has  only  nine  branches,  while  the  Bank  of 
France  must  maintain  at  least  one  special  branch 
in  each  of  the  eighty  departments  of  France,  and 
subsidiary  branches  amounting  in  number  to  be- 
tween five  hundred  and  one  thousand.  The  Bank 

88 


BANKING   CORPORATIONS 

of  Germany  has  even  more.  The  idea  is  to  make 
the  central  bank  responsible  for  the  granting  of 
loans  and  the  conduct  of  the  banking  operations  all 
over  France  and  Germany. 

An  erroneous  opinion  is  entertained  that  the 
capital  of  these  foreign  institutions  is  many 
times  greater  than  that  of  any  bank  in  this  coun- 
try. The  total  capital  of  the  Bank  of  France  is 
$35,200,000  with  $8,200,000  in  reserve.  The  Na- 
tional City  Bank  and  the  Bank  of  Commerce  in 
New  York  compare  favorably,  the  former  of  which 
has  a  capital  of  $25,000,000  and  a  surplus  of  $22,- 
000,000,  and  the  latter  a  capital  of  $25,000,000  and 
a  surplus  of  $14,000,000.  The  Bank  of  England 
has  more  than  any  of  them.  Its  capital  is  $70,- 
800, 000  and  surplus  about  $17, 000, 000.  The  Reichs- 
bank  has  $42,800,000  capital  and  $16,400,000 
surplus.  This  is  less  than  the  capital  of  the  Bank 
of  England,  but  more  than  that  of  the  Bank  of 
France  or  of  either  of  the  two  New  York  banks 
just  mentioned.  In  the  magnitude  of  operations 
the  Bank  of  England  surpasses  all  others.  In 
1908,  it  carried  about  $259,400,000  in  deposits; 
while  the  Imperial  Bank  of  Germany  had  $154,- 
400,000,  and  the  Bank  of  France  $134,300,000.  In 
comparison,  the  two  banks  in  New  York  referred 
to  above  had  deposits,  last  autumn,  amounting  to 
$176,000,000  and  $146,900,000,  respectively.  It 
would,  however,  be  erroneous  to  state  that  on  this 
account  these  institutions  of  New  York  assume  a 

89 


CORPORATIONS  AND   THE   STATE 

greater  importance  than  the  foreign  banks  men- 
tioned, which  it  might  be  added  pay  no  interest 
on  deposits. 

It  thus  appears  that  there  are  notable  differ- 
ences in  the  organization  and  management  of 
these  European  banks.  There  are  also  very  de- 
cided differences  in  their  methods  and  the  scope 
of  their  transactions,  as  compared  with  our  own. 
The  greater  area  of  our  own  country  and  the 
greater  difficulty,  notwithstanding  the  telephone 
and  telegraph,  with  which  one  bank,  say  on  the 
Atlantic  coast,  can  transact  business  with  one  be- 
yond the  Mississippi,  is  an  important  feature. 
Other  factors  are  the  spirit  of  individuality,  and 
the  desire  of  each  banker  to  manage  his  own  insti- 
tution, also  the  greater  degree  of  independence  of 
each  bank. 

One  very  important  function  of  each  of  these 
foreign  banks  mentioned,  is  the  control  which  it 
exerts  on  the  rates  of  interest.  In  a  troublous 
time  each  one  of  them  raises  the  rate.  Many  fluc- 
tuations occur  in  the  rate  of  the  Bank  of  England, 
and  a  considerable  number  in  that  of  the  Reichs- 
bank.  The  rate  of  the  Bank  of  France  is  the  low- 
est of  the  three,  and  subject  to  the  least  change. 
It  is  a  question  whether  the  bankers  and  business 
communities  of  this  country  would  welcome  an  in- 
stitution which  sought  to  control  the  rates  of  in- 
terest. Suppose  there  should  be  a  season  when 
the  managers  of  a  great  central  institution  thought 

90 


BANKING   CORPORATIONS 

it  was  best  to  raise  the  rate  from  4  to  5  per  cent. 
Perhaps  there  would  be  some  banks  having  sur- 
plus money  to  loan,  the  managers  of  which  would 
not  desire  an  increased  rate.  Restlessness  under 
external  control  would  cause  many  bankers  and 
business  men  to  say,  "The  domination  of  a  central 
institution  is  not  wanted." 

Each  bank  prefers  unhampered  control  of  its 
interest  rates.  But  without  such  influence  one  of 
the  strongest  reasons  for  a  central  bank  disap- 
pears. If  such  an  institution  should  be  organized, 
it  must  not  be  a  competitor  with  other  banks. 
That  was  one  of  the  greatest  objections  to  the  old 
United  States  Bank.  Any  central  institution  must 
be  merely  a  bankers'  bank,  and  the  government's 
fiscal  agent,  dealing  with  other  banks  and  with 
the  government  alone.  The  amounts  which  are 
now  in  the  Treasury  would  be  lodged  there,  and 
when  the  government  made  disbursements,  they 
would  be  made  through  this  bank  or  its  branches. 

Our  national  banks  also  differ  from  the  foreign 
banks  in  that  we  have  rigid  requirements  for  25 
and  15  per  cent,  reserves.  The  reserves  retained 
by  the  great  banks  abroad  are  usually  much  larger, 
though  there  is  no  hard  and  fast  legal  require- 
ment. The  joint  stock  banks  of  England,  which 
transact  most  of  the  business,  maintain  no  consid- 
erable reserve,  the  amount  often  falling  to  10  per 
cent,  or  even  less.  The  advisability  of  requiring 
a  fixed  reserve  is  open  to  question.  A  foreign 

91 


CORPORATIONS  AND   THE   STATE 

banker  compared  our  law  in  this  regard  with  his 
experience  in  obtaining  a  cab  at  Berlin.  He  went 
to  a  hack  stand,  and  found  only  one  cab  there.  It 
was  a  bitterly  cold  night,  and  very  late.  The 
cabman  said  he  could  not  take  the  banker  home 
because  he  was  in  reserve.  One  cab  at  least  must 
always  remain  at  the  stand.  In  a  way  that  inci- 
dent applies  to  our  system.  When  there  is  great 
demand  for  money  and  the  credit  of  a  bank  is 
endangered,  it  must  nevertheless  hold  on  to  its 
reserves.  The  law  is  sometimes  violated,  no 
doubt,  and  the  offenders  leniently  treated.  The 
question  arises  whether  it  would  not  be  better  to 
establish  a  system  in  which  there  is  either  one 
great  central  bank  or  a  strong  central  agency 
which  would  take  care  of  the  reserve  of  all  the 
banks.  An  important  function  of  a  central  bank 
is  the  possession  of  strength  sufficient  to  support 
all  other  institutions. 

A  sound  policy  demands  that  the  final  reserves  of 
banks  should  be  held  by  some  institution  which 
does  not  pay  interest.  As  it  now  is,  the  smaller 
banks  can  deposit  a  very  considerable  share  of  their 
reserve,  three-fifths,  with  the  larger  banks.  On 
these  deposits  they  receive  interest,  ordinarily  2 
per  cent.  In  this  practice  lies  one  of  the  most  se- 
rious defects  in  our  system.  The  reserve  bank 
must  pay  the  stipulated  interest,  and  it  cannot 
afford  to  do  so  merely  for  the  distinction  of  hav- 
ing large  balances  in  its  coffers.  It  must  utilize 

92 


BANKING   CORPORATIONS 

the  money  upon  which  it  pays  interest.  Suppose 
conditions  are  such  that  the  ordinary  demand  for 
money  is  slack.  The  managers,  in  their  search  for 
some  one  to  whom  their  funds  may  be  loaned,  find 
some  speculator  who  will  buy  stocks  if  he  can  ob- 
tain low  rates  of  interest.  This  continues  until 
there  is  great  demand  for  money  for  commercial 
purposes.  Where  is  it  to  be  obtained?  Under  the 
present  system  demands  for  money  are  kept  con- 
stantly at  a  maximum.  Whatever  money  is  de- 
posited upon  which  interest  is  paid  is  loaned  out  in 
a  slack  as  well  as  in  a  busy  season,  and  when  an 
added  demand  arises  there  is  no  source  from  which 
to  supply  it.  If  there  were  a  central  reserve 
agency,  or  a  central  bank  which  paid  no  interest, 
a  considerable  share  of  the  surplus  balances  would 
be  lodged  there,  and  if  there  was  no  ordinary  com- 
mercial demand  for  discounts  it  would  remain  un- 
til needed  for  harvesting  crops  or  to  supply  legiti- 
mate demands. 

This  question  was  once  discussed  by  the  Clearing 
House  Association  of  the  City  of  New  York.  A 
majority  of  bankers  disapproved  the  payment  of 
interest  on  reserve  deposits,  but  a  minority  main- 
tained that  a  change  would  disarrange  the  existing 
methods  of  doing  business  and  this  view  prevailed. 
Necessarily,  if  there  is  an  abolition  of  interest  on 
reserves,  the  net  result  would  be  that  less  money 
would  accumulate  in  the  great  financial  centers  and 
more  remain  in  local  banks  throughout  the  country. 

93 


CORPORATIONS  AND   THE   STATE 

The  National  Monetary  Commission  was  organ- 
ized in  1908,  for  the  purpose  of  studying  questions 
of  banking  and  currency,  and  recommending  legis- 
lation. Of  course  the  legislation,  recommended  or 
adopted  can  only  directly  affect  the  national  banks 
and  national  finance.  There  may  be  room  for  im- 
provement in  state  banks,  but  state  laws  govern 
their  management.  One  important  question  to  be 
decided,  is  whether  there  should  be  a  central  bank 
or  agency,  and  if  so,  what  regulations  shall  be 
made  for  its  control.  This  commission  was  organ- 
ized with  a  membership  of  nine  members  of  the 
House  of  Representatives  and  an  equal  number 
from  the  Senate.  It  was  thought  best  to  limit  the 
membership  to  those  who  had  legislative  experi- 
ence. One  reason  for  this  was  that  banking  ex- 
perts were  absolutely  unable  to  agree.  It  was 
deemed  advisable  that  the  Commission  should  se- 
cure information  from  different  countries  and  give 
hearings  to  all  who  might  care  to  appear.  A  very 
valuable  library  has  been  prepared. 

It  was  the  sentiment  of  the  Commission  that  it 
was  best  to  wait  until  it  could  present  some  meas- 
ure that  would  satisfactorily  solve  these  perplexing 
questions  and  meet  with  popular  approval,  rather 
than  to  recommend  some  hastily  considered  measure 
which  would  have  to  be  repealed  in  a  few  years.1 

1  A  summary  of  the  so-called  Aldrich  Plan,  recently  con- 
sidered by  the  Monetary  Commission,  is  added  as  Appen- 
dix D. 

94 


BANKING    CORPORATIONS 

In  this  connection  attention  should  be  directed  to 
the  exceptional  difficulty  of  the  task.  There  is 
no  branch  of  legislation  so  difficult  as  that  pertain- 
ing to  banking  and  currency.  There  are  more 
fantastical  ideas  on  this  subject  than  on  any  other 
and  a  constant  clash  of  selfish  interests.  Sena- 
tor Sherman  said  that  he  had  helped  to  frame 
many  financial  measures,  but  that  not  a  single  one 
of  them  had  ever  met  with  his  entire  approval. 
This  was  true,  he  said,  because  it  was  necessary  to 
make  concessions  to  popular  prejudices  and  to 
compromise  with  those  who  were  actuated  by  local 
and  personal  reasons.  He  once  stated  that  there 
never  was  a  time  after  the  enactment  of  the  Silver 
Purchase  Act  of  1890,  when  he  would  not  have 
been  ready  to  vote  for  its  repeal.  It  is  no  easy 
task  which  confronts  Congress  and  the  Monetary 
Commission,  when  they  seek  to  frame  wise  and 
adequate  financial  legislation  for  this  country. 
The  very  serious  loss  which  has  resulted  from  un- 
wise and  unjust  laws  in  the  past,  warns  us  to  pro- 
ceed with  great  caution  in  whatever  changes  are 
to  be  made  in  the  future. 

The  laws  relating  to  currency  in  this  country 
should  be  revised.  There  is  no  intelligent  excuse 
for  the  issuance  of  paper  money  by  the  govern- 
ment. The  natural  basis  for  currency  issues  is  the 
demands  of  trade.  If  there  is  a  time  when  a  very 
large  volume  of  discounts  based  upon  substantial 
assets  is  presented  to  a  bank,  that  is  the  time 

95 


CORPORATIONS   AND   THE   STATE 

when  additional  currency  ought  to  be  issued. 
More  is  needed  in  the  fall  than  in  the  spring. 
English  writers  term  this  seasonal  demand  the 
"autumn  drain."  Government  currency  on  the 
other  hand  must  be  absolutely  rigid  or  it  will  in- 
evitably be  issued  to  meet  demands  at  a  time  when 
money  should  be  obtained  by  the  exercise  of  the 
taxing  or  borrowing  power.  The  issue  of  cur- 
rency is  naturally  a  banking  function,  since  de- 
mands for  currency  respond  to  changing  business 
conditions.  Neither  the  greenbacks  nor  the  silver 
dollars  afford  any  elasticity  whatever,  and  it  may 
prove  advisable  that  the  whole  amount  of  green- 
backs be  withdrawn  from  circulation  and  some 
other  form  of  currency  substituted. 

All  considerations  point  to  one  conclusion,  that 
the  most  natural  foundation  upon  which  to  base 
currency  issues  is  the  assets  of  banking  institu- 
tions, but  that  privilege,  if  it  is  granted,  must  be 
safeguarded  with  the  utmost  care.  This  country 
has  already  seen  too  many  failures  of  banks,  too 
many  widespread  disasters,  because  some  banking 
institution  failed  to  meet  its  obligations.  The 
time  should  never  come  when,  if  a  man  reads  that 
a  bank  has  failed,  he  will  look  anxiously  to  his 
pocketbook  to  see  if  he  has  any  of  its  bills. 

Adequate  and  satisfactory  security  cannot  be 
maintained  by  a  mere  safety  fund.  It  is  asserted 
that  a  fund  amounting  to  3  per  cent,  of  all  issues 
could  be  provided,  and  that  all  losses  on  bank  notes 

96 


BANKING   CORPORATIONS 

could  never  exceed  that  amount.  If  this  is  true, 
why  should  not  all  banks  or  great  associations  of 
banks  unite  in  the  guaranty?  No  issue  of  individual 
banks  can  be  justified  unless  there  is  that  degree 
of  security  which  will  afford  the  nearest  possible 
approach  to  absolute  assurance  that  every  bill  cir- 
culating through  the  country  will  be  paid. 

Provision  for  diminishing  the  circulation  when  it 
is  redundant  is  quite  as  necessary  as  for  increasing 
it  when  it  is  scarce.  Under  a  perfect  currency 
system,  if  there  is  a  slack  demand  for  money,  notes 
would  be  canceled,  and  the  quantity  in  circulation 
diminished.  Legislation  should  direct  that  the 
right  and  the  obligation  to  decrease  must  be 
joined  with  the  right  to  increase. 


CHAPTER  V 
CORPORATIONS  AND  THE   PUBLIC  WELFARE 

ASSOCIATION  or  co-operation  is  a  necessary  con- 
dition of  human  progress,  and  manifests  itself  in 
many  forms,  political,  religious,  commercial,  or  in- 
dustrial. The  modern  corporation  as  one  form  of 
association  is  the  latest  and  most  perfect  agency 
for  the  accomplishment  of  results  on  a  large  scale. 
It  renders  available  the  collective  capital  and  effort 
of  many  under  one  control.  It  occupies  the  very 
center  of  the  stage  in  industry,  finance,  and  com- 
merce. Indeed  it  comprises  the  vast  majority  of 
operations  in  banking,  insurance,  transportation, 
and  manufacture,  not  to  mention  other  forms  of 
activity.  Thus,  the  operations  of  the  corporation 
must  have  the  most  far-reaching  influence  upon 
public  welfare. 

The  extent  to  which  the  business  of  the  country 
is  performed  by  corporations  is  well  illustrated  in 
a  recent  report  summarizing  the  returns  made  for 
the  levy  of  the  corporation  tax  imposed  by  the  Act 
of  August  5,  1909.  This  shows  that  in  1910  there 
were  in  the  United  States  262,490  corporations  with 
a  capital  stock  of  $52,371,000,000,  and  having  a 
bonded  indebtedness  of  $31,333,000,000.  The  net 

98 


CORPORATIONS   AND   PUBLIC  WELFARE 

income  of  all  these  corporations  after  paying  fixed 
charges,  including  interest  on  their  bonds,  was 
$3,125,000,000.  The  total  wealth  of  the  United 
States,  as  estimated  in  1904,  aggregated  $107,000,- 
000,000.  According  to  the  rate  of  increase  at  the 
date  of  the  last  computation  it  may  be  estimated  at 
$130,000,000,000  in  1910.  The  head  of  the  Bureau 
of  Statistics  gives  that  as  a  conservative  estimate. 
Very  likely  it  is  somewhat  greater  than  that,  or 
about  $135,000,000,000,  averaging  between  $1,400 
and  $1,500  per  inhabitant. 

It  thus  appears  that  the  property  owned  by  cor- 
porations is  between  three-fifths  and  two-thirds  of 
the  total  wealth  of  the  United  States.  The  state- 
ment has  sometimes  been  rather  loosely  made  that 
the  property  of  corporations  comprehends  as  much 
as  four-fifths.  It  is  true  that  the  stocks  of  many 
corporations  are  not  remunerative,  but  in  spite  of 
this  the  income  derived,  $3,125,000,000,  is  slightly 
more  than  6  per  cent,  on  the  whole  $52,000,000,000, 
and  in  addition  interest  must  be  paid  on  $31,000,- 
000,000  of  bonds.  This  would  indicate  that  the 
capitalization  plus  the  amount  of  bonds  correctly 
measures  the  value  of  their  property  as  a  whole. 
It  must  be  remembered  that  while  some  stocks 
pay  no  dividends  at  all,  others  pay  dividends  even 
as  high  as  40  per  cent.  Not  only  is  this  the  case, 
but  most  of  the  colossal  fortunes  acquired  in  this 
country  have  been  gained  by  those  interested  in 
or  associated  with  corporations.  The  corporation 

99 


CORPORATIONS  AND   THE   STATE 

stands  behind  our  industrial  and  commercial  activ- 
ity and  determines  the  direction  of  all  industrial 
and  commercial  effort.  All  these  facts  lead  to  the 
conclusion  that  we  have  reached  a  new  era  in  the 
relation  between  the  corporations  and  the  state. 

The  principle  stated  by  Adam  Smith,  and  adopted 
by  the  so-called  classical  school  of  political  econo- 
mists, was  that  the  best  method  for  the  promotion 
alike  of  industrial  activity  and  human  welfare  was 
to  give  the  greatest  possible  freedom  to  each  indi- 
vidual, to  relieve  industry  from  the  harassing  con- 
trol of  public  regulation  and  from  laws  fettering 
the  exercise  of  economic  effort.  This  was  the  so- 
called  laissez-faire  doctrine.  It  was  very  well  ex- 
pressed by  Jeremy  Bentham  when  he  said,  "Indus- 
try and  commerce  only  ask  of  the  state  that  which 
Diogenes  asked  of  Alexander,  'Keep  out  of  my  sun- 
shine.'" Under  the  old  theory,  it  was  maintained 
that  not  only  those  who  were  directing  enterprises, 
the  captains  of  industry  of  to-day,  but  also  em- 
ployees, including  workmen  of  all  classes  should 
be  left  to  take  care  of  themselves.  Such  theories 
have  been  very  generally  discredited.  The  evidence 
of  this  is  seen  in  numerous  laws  of  states  and  na- 
tions restricting  hours  of  labor,  the  ages  of  working 
women  and  children,  and  also  in  such  regulations 
as  factory  acts,  and  other  laws  for  the  preservation 
and  safety  of  life  and  of  health. 

The  progress  made  along  these  lines  has  not  been 
entirely  the  result  of  the  moral  and  mental  disposi- 

100 


CORPORATIONS  AND   PUBLIC  WELFARE 

tion  of  legislators.  As  already  pointed  out,  laws 
and  regulations  relating  to  corporations,  as  well  as 
to  all  our  activities,  often  have  their  basis  in  con- 
temporaneous conditions.  In  the  earlier  days, 
when  there  were  no  factory  acts,  it  was  difficult  for 
the  workingman  to  obtain  more  than  a  bare  sub- 
sistence. The  most  gratifying  feature  of  material 
progress  has  been  that  in  the  multiplication  of  ap- 
pliances, in  the  march  of  invention,  in  the  opening 
up  of  new  fields  from  which  food  may  be  obtained, 
and  in  the  better  means  of  transportation  it  is  not 
only  easier  at  the  present  time  to  sustain  life,  but 
it  is  possible  to  give  to  the  average  man  and  woman 
more  comforts  and  luxuries,  and  to  alleviate  the 
burdens  of  toil  which  were  so  severe  under  less 
advanced  conditions. 

Along  with  provisions  for  the  control  of  commer- 
cial and  industrial  operations  and  for  the  welfare 
of  human  beings,  in  the  form  of  laws  for  safety  of 
life  and  preservation  of  health,  there  has  been  a 
well-defined  field  of  activity  in  preventing  corpo- 
rations from  exacting  extortionate  charges.  In 
nothing  has  this  been  so  marked  as  in  laws  relating 
to  charges  for  services  to  the  public.  The  decision 
of  Chief  Justice  Waite  of  the  Supreme  Court  of  the 
United  States  in  1876,  in  the  case  of  Munn  v.  Illi- 
nois,1 laid  down  the  principle,  that  when  property 
becomes  clothed  with  a  public  interest,  when  used 

'94U.  S.  (S.  C.),  113. 
101 


CORPORATIONS  AND   THE  STATE 

in  a  manner  to  make  it  of  general  consequence,  and 
to  affect  the  public  at  large,  it  must  submit  to  legis- 
lative regulation.  This  case  involved  grain  eleva- 
tor charges  in  the  city  of  Chicago.  The  decision  of 
Chief  Justice  Waite  was  to  the  effect  that  it  was 
proper  for  the  legislature  to  fix  charges,  and  that 
it  was  in  no  sense  a  judicial  question.  This  dictum 
has  been  modified  in  one  important  particular.  It 
has  since  been  held  by  the  Supreme  Court  of  the 
United  States  and  by  other  courts,  that  these  legis- 
lative regulations  must  not  go  to  the  extent  of 
confiscating  property,  that  under  the  Fourteenth 
Amendment  property  is  secured  against  unlawful 
or  unjust  regulation  by  legislative  or  any  other 
authority,  so  that  when  charges  have  been  fixed  at 
a  rate  so  low  that  it  amounts  to  confiscation,  then 
the  courts  may  review  or  entirely  set  aside  the  ac- 
tion of  the  legislature. 

This  decision  in  the  Munn  case  makes  numerous 
quotations  from  English  decisions,  the  language  of 
which  would  seem  to  show  that  the  decision  of 
the  Chief  Justice  initiated  or  established  no  new 
principle.  An  authority  from  which  he  quotes  is 
Sir  Matthew  Hale,  who  said: 

A  man,  for  his  own  private  advantage,  may,  in  a 
port  or  town,  set  up  a  wharf  or  crane,  and  may  take 
what  rates  he  and  his  customers  can  agree  for  cranage, 
wharfage,  housellage,  pesage;  for  he  doth  no  more 
than  is  lawful  for  any  man  to  do,  namely,  makes  the 
most  of  his  own.  If  the  king  or  subject  have  a  public 

102 


CORPORATIONS  AND    PUBLIC  WELFARE 

wharf,  unto  which  all  persons  that  come  to  that  port 
must  come  and  unlade  or  lade  their  goods  as  for  the 
purpose,  because  they  are  the  wharfs  only  licensed  by 
the  queen,  or  because  there  is  no  other  wharf  in  that 
port,  as  it  may  fall  out  where  a  port  is  newly  erected ; 
in  that  case  there  cannot  be  taken  arbitrary  and  exces- 
sive duties  for  cranage,  wharfage,  pesage,  etc.,  neither 
can  they  be  enhanced  to  an  immoderate  rate ;  but  the 
duties  must  be  reasonable  and  moderate,  though  set- 
tled by  the  king's  license  or  charter.  For  now  the 
wharf  and  crane  and  other  conveniences  are  affected 
with  a  public  interest,  and  they  cease  to  be  juris 
privati  only;  as  if  a  man  set  out  a  street  in  new  build- 
ing on  his  own  land,  it  is  now  no  longer  bare  private 
interest,  but  is  affected  by  a  public  interest. 

In  another  place  Chief  Justice  Waite  speaks  of  the 
numerous  regulations  in  this  country  for  determi- 
ning the  prices  charged  by  innkeepers  and  others 
who  are  held  to  exercise  a  quasi-public  privilege, 
and  refers  with  apparent  approval  to  a  case  de- 
cided in  the  Supreme  Court  of  Alabama,  where  a 
power  granted  to  the  city  of  Mobile  to  license 
bakers  and  regulate  the  weight  and  price  of  a  loaf 
of  bread  was  sustained  on  the  ground  that  the 
"calling  of  the  baker  affects  the  public  interest,  or 
private  property  is  employed  by  him  in  a  manner 
which  directly  affects  the  body  of  the  people." 

If  the  principle  may  be  regarded  as  established 
that  the  state  has  the  right  to  regulate  prices 
whenever  they  directly  affect  the  body  of  the  people, 

103 


CORPORATIONS   AND   THE   STATE 

it  is  necessary  to  consider  the  circumstances  under 
which  rates  or  prices  can  be  so  increased  as  to  have 
such  effect.  These  arise  whenever  any  individual 
or  corporation  acquires  a  monopoly  absolute  or  par- 
tial. The  marvelous  revolution  in  methods  now 
apparent  may  forecast  the  time  when  an  industrial 
or  commercial  corporation  can  become  a  monopoly 
quite  as  complete  as  that  of  a  natural  monopoly  like 
a  railway.  If  that  situation  ever  arises,  the  ques- 
tion will  then  be  raised  whether  the  right  to  con- 
trol the  price  of  an  article  made  in  a  factory  should 
not  be  exercised  in  the  same  manner  as  the  right 
to  determine  the  rate  per  mile  for  a  passenger  or 
ton  of  freight. 

With  rare  exceptions  it  has  not  thus  far  been 
deemed  advisable,  save  in  case  of  public  service 
corporations,  to  control  prices  by  law  or  regulation. 
But  the  increasing  power  of  great  industrial  com- 
binations is  assuming  a  practical  as  well  as  a  theo- 
retical importance  in  its  relation  to  the  public  wel- 
fare. The  new  conditions  are  not  yet  sufficiently 
well  defined  to  enable  us  to  forecast  with  entire 
accuracy  the  extent  to  which  monopoly  in  any 
branch  of  industry  or  trade  may  become  an  estab- 
lished fact,  though  indications  point  to  continued 
development  in  that  direction. 

It  is  a  question,  however,  whether  there  are  not 
natural  as  well  as  legal  checks  to  the  unlimited 
growth  of  combinations.  While  some  believe  that 
as  they  increase  in  size  they  gain  efficiency,  the 

104 


CORPORATIONS  AND   PUBLIC  WELFARE 

contrary  view  that  a  combination  may  grow  so 
large  as  to  become  unwieldy  and  incapable  of  pro- 
ducing as  economically  as  a  smaller  concern,  is  in 
some  instances  more  correct.  It  is  clear  that  if  a 
combination  attempts  to  raise  prices,  so  long  as 
any  competition  at  all  exists,  this  increase  will  in- 
ure as  well  to  the  benefit  of  independent  and  out- 
side companies.  This  has  been  the  experience  of 
the  United  States  Steel  Corporation.  The  effect  of 
actual  or  potential  competition  is  always  to  bring 
down  prices.  Another  fact  is  that  whenever  the 
prices  of  articles  are  raised  where  the  demand  is 
elastic,  the  consumption  is  inevitably  diminished. 

These  factors  act  as  a  restraint  upon  the  success 
of  the  great  organizations.  The  question  of  ability 
in  management  must  also  be  considered.  Generally 
speaking,  it  has  been  true  in  this  country  that 
whenever  a  manager  was  needed  for  a  great  rail- 
way or  for  a  large  industrial  establishment,  it  has 
been  possible  to  find  a  man  of  sufficient  ability. 
But  there  is  no  certainty  that  there  will  always  be 
such  management  of  these  great  corporations  as  to 
insure  their  success,  especially  if  they  continue  to 
increase  in  size. 

It  is  interesting  in  this  connection  to  note  the 
persistence  of  competition,  notwithstanding  the 
advantages  of  these  great  combinations.  It  was 
stated  some  years  ago,  that  the  American  Sugar 
Refining  Company,  commonly  known  as  the  Sugar 
Trust,  controlled  98  per  cent,  of  the  business  of 

105 


CORPORATIONS   AND   THE   STATE 

refining  sugar  in  the  United  States.  It  now  con- 
trols not  more  than  60  or  70  per  cent.,  which  shows 
how  competitors  have  made  inroads  upon  its  busi- 
ness. No  corporation  in  this  country,  probably, 
has  ever  had  so  great  advantages  from  intelligent 
management  and  from  favors  extended  to  it  as  the 
Standard  Oil  Company,  and  yet  in  its  palmiest 
days  the  independent  oil  refineries  were  in  evi- 
dence. At  a  time  when  it  was  at  the  height  of  its 
prosperity,  a  large  company  was  organized  which 
proved  a  formidable  competitor  in  the  foreign 
trade.  Various  estimates  have  been  made  as  to 
the  proportion  of  business  controlled  by  the  United 
States  Steel  Corporation.  It  is  probable  that  it 
amounts  to  about  one-half  of  the  total  production 
of  iron  and  steel,  though  in  certain  lines  it  may 
equal  90  per  cent,  or  even  more.  This  corporation 
also  has  an  unusual  advantage  in  the  possession  of 
great  fields  of  raw  material,  such  as  coal  and  iron 
ore.  Nevertheless  the  independent  iron  and  steel 
producers  seem  to  be  thriving  and  are  building 
new  mills. 

Notwithstanding  this  persistence  of  competition, 
a  greater  degree  of  harmony  than  formerly  exists 
to-day  between  the  principal  establishments  and 
their  competitors.  A  good  illustration  of  this  fact 
is  the  frequent  meeting  of  the  iron  and  steel  men 
of  the  country.  Apparently  their  consultations 
have  rather  more  binding  force  than  the  gentle- 
men's agreements  of  thirty  years  ago.  Clearly 

106 


CORPORATIONS   AND   PUBLIC   WELFARE 

this  greater  harmony  is  in  pursuance  of  the  idea 
which  has  now  become  more  firmly  fixed  among 
producers,  that  competition  is  destructive  in  its 
effects. 

Some  of  the  radical  writers  say  the  first  thing  to 
do,  is  to  decide  which  is  better— combination  and 
co-operation,  or  competition.  If  it  be  agreed  that 
the  former  are  more  salutary,  all  this  advocacy  of 
rights  and  opportunities  for  the  independent  pro- 
ducer is  wrong.  We  should  accept  the  situation 
and  assist  efforts  for  consolidation  in  every  possi- 
ble way.  But  it  has  not  yet  been  established 
that  the  elimination  of  all  competition,  except  in 
the  case  of  natural  monopolies,  is  beneficial  to  the 
public.  In  fact  it  appears  almost  impossible  to  do 
away  with  all  competition  when  there  is  a  plurality 
of  establishments  engaged  in  the  same  branch  of 
industry,  whether  under  one  management  or  not. 

This  is  even  true  in  regard  to  railroads  belonging 
to  the  same  owners,  for  there  is  a  measure  of  rivalry 
among  managers  whenever  they  are  given  that 
scope  in  their  authority  and  activity  which  will 
make  them  most  efficient  in  accomplishing  results. 
The  readier  facilities  furnished  by  one  line  or  a 
greater  spirit  of  accommodation  create  a  degree  of 
competition  which  is  incident  to  separate  control, 
whatever  the  ownership.  The  efforts  to  obtain  a 
larger  volume  of  business  or  to  effect  economies 
also  tend  in  the  same  direction. 

It  is  said  by  some  writers  that  none  of  these 
107 


CORPORATIONS   AND   THE   STATE 

great  industrial  combinations  could  exist  except 
for  certain  well-defined  advantages  or  privileges. 

One  often  mentioned  is  the  receipt  of  favors 
from  railways  which  no  doubt  did  exert  an  impor- 
tant influence  in  building  up  some  corporations. 
The  growth  of  many  large  companies  twenty  or 
thirty  years  ago,  was  undoubtedly  associated  with 
rebates  in  railroad  rates.  Happily  this  practice 
was  virtually  abolished  about  seven  years  ago. 

Another  argument  is  that  they  could  not  succeed 
except  for  the  assistance  afforded  by  the  tariff. 
While  tariffs  have  undoubtedly  benefited  certain 
trusts,  the  real  explanation  for  their  growth  must 
be  sought  in  more  potent  causes.  Some  combina- 
tions in  this  country  have  never  been  aided  by  pro- 
tection. It  would  be  absurd  to  say  that  the  Stand- 
ard Oil  Company  depends  in  any  degree  for  its  suc- 
cess upon  the  tariff,  and  equally  absurd  to  make 
the  same  assertion  regarding  the  Beef  Trust.  And 
then  going  beyond  our  own  borders  to  foreign 
countries,  we  find  similar  combinations  in  exist- 
ence. They  are  prominent  in  England  where  free 
trade  has  long  been  the  settled  policy. 

Again,  it  is  said  that  these  combinations  could 
not  exist  without  advantages  such  as  the  possession 
of  great  quantities  of  raw  materials  or  an  entire  or 
partial  monopoly  of  natural  resources.  More  im- 
portance should  be  ascribed  to  this  assertion  than 
to  the  claims  regarding  the  effects  of  a  protective 
tariff,  and  yet  it  is  not  entirely  correct.  No  com- 

108 


CORPORATIONS   AND   PUBLIC   WELFARE 

pany  has  ever  secured,  either  by  purchase  or  by 
government  grant,  such  control  of  any  natural  re- 
source as  to  establish  a  complete  monopoly.  There 
is  enough  in  this  contention,  however,  to  impel  us  to 
conserve  our  national  domain.  The  giving  away 
of  large  areas,  empires  you  may  say,  to  railway 
companies  was  not  prompted  by  any  dishonest  in- 
tention or  by  any  disposition  of  favoritism.  It  was 
thought  that  vast  stretches  of  agricultural  and  other 
lands  would  be  made  available  by  that  method, 
and  that  in  giving  the  alternate  sections  to  railway 
companies,  the  government  added  enough  value  to 
those  which  it  retained  to  make  it  a  profitable 
transaction.  That  is,  if  it  owned  two  sections, 
each  of  which  would  sell  for  $1.25  per  acre,  and 
gave  one  to  a  railway  company  as  an  incentive  to 
build,  the  remaining  section  would  be  worth  $2.50 
or  more,  and  settlers  could  occupy  and  utilize 
areas  theretofore  unavailable. 

We  cannot,  however,  close  our  eyes  to  the  fact 
that  this  policy,  salutary  though  it  may  have  been 
in  the  beginning,  was  carried  too  far,  nor  can  we 
overlook  the  fact  that  individuals  and  corporations 
as  a  result  of  this  policy  have  gained  control  of 
enormous  areas  of  coal  and  timber  lands.  One  of 
the  burning  questions  of  the  time  is  the  conserva- 
tion of  our  natural  resources.  Not  that  they  are 
to  be  kept  from  utilization,  but  that  the  govern- 
ment is  not  to  dispose  of  them  in  such  a  way  as  to 
make  it  possible  for  a  few  men  to  control  such  a 

109 


CORPORATIONS  AND   THE   STATE 

quantity  of  mineral  and  other  wealth  of  the  coun- 
try as  will  interfere  with  equality  of  opportunity. 
A  judicious  policy  of  leasing  these  lands  would  go 
far  to  solve  the  problem.  Certainly  the  adoption 
of  such  a  policy  would  be  best  in  some  localities, 
and  for  some  species  of  mineral  and  timber  lands, 
always  bearing  in  mind,  of  course,  the  desirability 
of  not  delaying  or  retarding  the  future  growth  and 
development  of  the  newer  sections  of  the  Union. 

There  is  much  justice  in  the  contention  of  the 
citizens  of  Western  states  like  Idaho  and  Montana, 
that  they  are  being  compelled  to  keep  their  forests 
intact  while  the  Eastern  states  have  been  allowed 
to  clear  theirs  for  agricultural  purposes. 

Finally,  it  is  asserted,  with  the  support  of  a  per- 
tinent array  of  facts,  that  the  great  combination 
could  not  exist  without  the  use  of  unfair  methods, 
such  as  cutting  prices  in  one  locality,  while  main- 
taining them  in  others,  or  selling  one  brand  below 
cost  and  recouping  the  loss  from  the  profits  on  other 
brands,  or  refusing  to  sell  to  a  retailer  who  also 
handles  the  goods  of  a  competitor.  Such  practices 
as  these  deserve  the  severest  condemnation.  They 
make  it  possible  for  a  less  efficient  producer  to  club 
out  his  competitors,  even  though  they  may  be  ren- 
dering cheaper  and  better  service  to  the  public. 

Certain  remedies  have  been  proposed  for  these 
practices  which  will  be  discussed  in  the  following 
chapter. 

An  important  question  in  connection  with  the 
110 


CORPORATIONS   AND   PUBLIC   WELFARE 

modern  development  of  combination  is  whether  it 
will  not  eventually  result  in  state  socialism.  The 
Socialists  welcome  the  formation  of  each  trust  or 
combination.  They  say  that  trusts  demonstrate  the 
superior  utility  of  production  on  a  large  scale,  and 
that  this  movement  is  but  paving  the  way  for  the 
ultimate  transfer  of  all  industrial  operations  to  the 
state.  It  is  not  necessary  here  to  enter  upon  a  dis- 
cussion of  the  merits  of  the  Socialistic  propaganda. 
It  is  perfectly  obvious  that  the  progress  of  the  race 
has  depended  in  the  past  and  will  depend  in  the 
future  upon  that  degree  of  incentive  and  ambition 
which  belongs  to  each  individual,  and  that  any 
leveling  process  which  does  away  with  the  desire 
to  participate  in  the  possible  rewards  of  personal 
ability  and  industry  must  bring  disaster.  Further- 
more the  formation  of  gigantic  corporations  does 
not  necessarily  mean  the  extinction  of  all  the  smaller 
concerns.  In  every  metropolis  thousands  of  small 
stores  thrive  in  competition  with  the  department 
stores,  and  in  almost  every  branch  of  industry  and 
commerce  the  man  of  limited  means  if  properly 
protected  against  illegal  and  unfair  methods  has 
an  opportunity  for  conducting  a  profitable  busi- 
ness. 

It  is  sometimes  argued  that  the  performance  of 
certain  services  by  cities  and  states  is  an  entering 
wedge  for  taking  over  industrial  and  other  estab- 
lishments. A  moment's  consideration  will  show 
that  these  services  undertaken  by  political  organi- 

111 


CORPORATIONS   AND   THE   STATE 

zations,  such  as  cities  and  states,  differ  widely 
from  the  general  field  of  industry  which  implies  a 
wide  market  with  natural  competition.  There  is 
a  decided  difference  between  the  manufacture  of 
gas  in  the  city  of  Philadelphia  and  the  manufacture 
of  carpets.  The  former  article  is  not  merely  essen- 
tial for  the  convenience  of  a  municipality,  but  its 
sale  is  necessarily  restricted  within  a  narrow  area, 
where  the  duplication  of  competing  plants  would 
be  a  waste  of  money.  On  the  other  hand  carpets 
can  be  sold  from  the  Atlantic  to  the  Pacific,  and 
made  in  any  state  from  Maine  to  California. 
Hence  it  is  apparent  that  municipal  or  state  control 
of  an  article  of  strictly  local  production  and  con- 
sumption is  far  different  from  the  attempt  to  con- 
trol the  production  of  articles,  most  of  which  have 
a  wide  sale.  On  a  larger  scale  the  same  distinc- 
tion is  true  of  such  railways  as  have  been  taken 
over  by  the  state  in  foreign  countries.  Railways 
are  natural  monopolies,  whether  owned  by  the 
state  or  by  privileged  corporations. 

A  question  already  referred  to  in  the  first  chap- 
ter, is  whether  corporations  will  ever  succeed  in 
exercising  an  undue  or  preponderant  influence  upon 
legislation  and  administration.  A  certain  degree 
of  danger  from  the  contribution  of  money  by  cor- 
porations to  influence  elections,  or  from  the  mass- 
ing of  their  employees  as  voters  may  exist,  but  it 
has  been  greatly  exaggerated.  Decided  progress 
has  been  made  in  the  last  few  years  by  state  and 

112 


CORPORATIONS  AND   PUBLIC  WELFARE 

national  legislatures  in  passing  laws  compelling 
the  publication  of  contributions  for  political  cam- 
paigns. Laws  have  also  been  enacted  forbidding 
corporations  to  contribute  for  this  purpose.  Those 
who  to-day  have  charge  of  the  practical  work 
of  conducting  political  contests  will  confirm  the 
statement  that  it  is  much  more  difficult  to  raise 
money  than  when  the  names  of  subscribers  were 
not  made  public.  The  massing  of  the  employees 
of  a  large  corporation  may  be  possible,  but  in 
many  instances  the  managers  of  corporations  say 
that  their  employees  show  such  a  spirit  of  inde- 
pendence that  they  think  it  better  not  to  advise 
them  how  to  vote. 

The  danger  of  corrupting  public  servants  by  cor- 
porations is  also  mueh  exaggerated.  Mr.  Champ 
Clark,  now  Speaker  of  the  House  of  Representa- 
tives, recently  stated  that  he  had  been  sixteen 
years  a  member  of  Congress,  and  that  no  one  had 
ever  made  a  proposition  to  him  that  squinted 
toward  corruption.  The  practical  certainty  of  ex- 
posure is  such,  that  influence  by  bribery  is  be- 
coming each  year  more  and  more  impossible,  not- 
withstanding occasional  disgraceful  exposures  in 
state  legislatures  and  city  councils.  The  public 
knows  what  a  legislator  would  naturally  do  under 
given  circumstances.  If  he  does  anything  contrary 
to  that,  the  light  of  inquiry  is  immediately  turned 
upon  him. 

The  personal  and  social  affiliations  of  officers  of 
9  113 


CORPORATIONS   AND   THE   STATE 

great  companies  and  of  those  who  are  interested 
in  them  as  investors  is  a  possible  source  of  un- 
wholesome influence  upon  members  of  legislative 
or  administrative  bodies.  The  list  of  those  iden- 
tified with  large  corporations  includes  many  men 
of  very  marked  ability  and  of  high  standing. 
Nevertheless,  they  sometimes  seek  the  promotion 
of  selfish  interests  with  intense  eagerness,  and  by 
conferring  favors  and  utilizing  means  at  their  dis- 
posal they  are  able  to  create  obligations  which  are 
embarrassing.  The  use  of  passes  by  legislators 
has  been  forbidden  by  law.  No  person  holding  a 
public  office  should  be  allowed  to  accept  favors  of 
this  kind.  It  is  true,  however,  that  an  increasing 
number  of  corporate  managers  abstain  from  seek- 
ing to  influence  legislation,  while  others  insist 
that  their  sole  desire  in  presenting  their  side  of 
the  case  to  public  officials  or  committees  is  to  pre- 
vent unfair  or  discriminatory  legislation. 

A  greater  danger  arises  when  legislative  or  other 
bodies  contain  an  undue  proportion  of  those  inter- 
ested in  corporate  enterprises.  The  promotion  of 
personal  advantage  resulting  in  such  a  case  would 
likewise  exist  if  a  majority  of  the  members  should 
be  interested  in  any  class  of  legislation.  Further- 
more, the  reason  for  the  action  of  many  officials  and 
legislators  in  defense  of  corporations  is  a  belief 
that  they  are  the  best  agency  for  promoting  busi- 
ness and  the  fear  that  even  if  salutary  and  neces- 
sary legislation  is  passed,  it  will  interfere  with  the 

114 


CORPORATIONS  AND   PUBLIC  WELFARE 

orderly  and  prosperous  course  of  events.  Their 
anxiety,  as  they  express  it,  is  not  so  much  for  the 
success  of  the  corporation,  as  for  the  welfare  of 
the  country. 

The  influence  of  corporations  on  the  welfare  of 
two  or  three  particular  classes  of  persons  displays 
certain  well-defined  tendencies.  In  the  case  of 
laborers,  the  number  of  men  employed  is  naturally 
somewhat  diminished  by  combination,  because 
with  large  industrial  plants,  equipped  with  the 
very  best  appliances,  machinery  performs  a  larger 
share  of  the  work  and  a  less  number  of  men  is 
necessary.  This  applies  especially  to  unskilled 
labor.  As  regards  the  employment  of  skilled 
labor,  the  tendency  is  not  so  well  defined.  Per- 
haps there  again  to  some  extent  machinery  takes 
the  place  of  human  energy,  but  in  the  complex 
organization  of  great  establishments  and  the  eager 
rush  to  have  the  best  appliances,  skill  and  invent- 
ive genius  are  valuable  possessions  and  always  in 
demand.  There  is  no  doubt  but  that  large  com- 
binations have  an  advantage  in  labor  disputes,  be- 
cause of  their  greater  power  and  opportunity  as 
compared  with  a  smaller  or  single  concern.  They 
can  afford  to  close  down  for  a  time  and  can  ac- 
cumulate stock  beforehand.  Then  again  they  usu- 
ally have  a  plurality  of  plants,  some  in  one  state, 
some  in  another,  and  if  there  is  a  strike  in  one 
mill,  the  orders  can  be  transferred  to  another.  It 
is  also  much  easier  to  deal  with  men  scattered  over 

115 


CORPORATIONS   AND   THE  STATE 

several  states  than  with  men  in  one  small  estab- 
lishment or  centered  in  one  place. 

As  regards  welfare  and  the  wages  which  can  be 
paid,  the  advantages  resulting  from  combination 
are  in  favor  of  the  workman.  The  great  estab- 
lishment can  afford  to  make  provision  in  the  way 
of  pensions ;  it  has  capital  enough  to  accumulate  a 
fund  for  this  purpose,  and  while  in  actual  practice 
it  may  not  have  proved  true,  nevertheless,  by  its 
control  of  the  market,  by  the  greater  utilization  of 
by-products  and  the  greater  economies  which  it  is 
able  to  effect,  it  can  afford  to  pay  better  wages 
and  give  steadier  employment.  Labor  organiza- 
tions as  a  rule  have  not  been  opposed  to  the  trust 
movement,  and  have  undoubtedly  secured  some 
share  of  the  gain.  It  is  only  when  the  trust  be- 
comes an  assured  monopoly  that  its  effect  upon 
wages  may  in  the  end  be  dangerous  to  the  labor- 
ers, though  such  a  result  would  not  be  the  neces- 
sary sequence. 

We  come  now  to  the  influence  of  combination 
upon  the  welfare  of  the  investor.  Laws  upon  this 
subject  have  been  neglected  by  our  legislatures. 
The  investor  is  the  one  who  has  suffered  most 
from  the  machinations  of  the  promoter,  from  over- 
capitalization, and  from  manipulation  of  the  mar- 
ket. In  brief,  the  net  result  has  been  a  revolution 
in  stockholding.  In  the  early  development  of  cor- 
porate enterprises,  which  were  of  course  on  a 
smaller  scale  than  at  present,  subscriptions  for 

116 


CORPORATIONS  AND   PUBLIC  WELFARE 

stock  were  largely  made  in  the  locality  in  which 
the  corporation  was  located.  The  majority  of 
stock  is  now  held  by  capitalists,  or  by  great  insti- 
tutions such  as  life  insurance  companies  and  sav- 
ings banks,  though  of  late  there  has  been  a  success- 
ful effort  by  certain  corporations  to  diffuse  stock 
holdings  among  a  larger  number  of  holders.  Losses 
from  irregular  or  illegal  methods  in  management 
and  from  efforts  of  large  holders  to  obtain  control 
have  caused  popular  distrust  and  have  had  a  ten- 
dency to  retard  the  normal  increase  of  investors, 
especially  in  speculative  stocks.  The  demand  for 
high-grade  securities  has  been  correspondingly  in- 
creased to  such  an  extent  that  their  yield  is 
unduly  low  as  compared  with  the  earning  power 
of  the  company,  and  their  price  so  high  that  the 
average  citizen  cannot  afford  to  buy  them.  The 
reform  that  is  needed  is  to  establish  such  a  degree 
of  public  confidence  that  the  small  investor  in  the 
United  States  who  saves  a  few  hundred  dollars, 
will  have  confidence,  as  he  now  has  in  Germany, 
that  if  he  invests  in  the  stock  of  some  corporation, 
he  can  be  certain  that  it  will  be  honestly  managed, 
and  he  will  receive  his  share  of  whatever  profits 
are  made. 

The  independent  producer  has  undoubtedly 
suffered  greatly  as  a  result  of  the  combination 
movement.  He  has  often  been  a  victim  of  ruthless 
competition  and  unfair  practices,  which  the  laws 
and  courts  seemed  powerless  to  prevent.  To  the 

117 


CORPORATIONS   AND   THE   STATE 

extent,  however,  that  the  independent  producer 
has  been  displaced  because  of  inefficiency  and  in- 
ability to  produce  as  cheaply  as  the  trust,  the  pub- 
lic should  be  benefited  rather  than  injured  by  his 
elimination.  The  disappearance  of  the  small  entre- 
preneur has  often  been  deplored,  but  he  has  fre- 
quently secured  a  position  equally  remunerative, 
with  less  risk  and  equally  effective  in  developing 
his  talents  in  the  combination  which  displaced 
him. 

The  consumer  also  has  not  always  reaped  the 
benefits  that  he  should  receive  from  the  organiza- 
tion of  a  combination.  With  few  exceptions,  the 
prices  of  trust  products  have  not  been  exorbitantly 
high,  neither  have  they  been  reduced  as  low  as  con- 
ditions warranted.  The  trusts  have  been  able  to 
increase  the  margin  of  profits,  by  keeping  prices 
stable,  while  reducing  the  cost  of  production. 
Finally,  the  producer  of  raw  materials  used  by 
trusts,  such  as  tobacco,  oil,  sugar,  and  beef,  have 
sometimes  been  forced  to  dispose  of  these  products 
at  unremunerative  prices.  The  danger  of  being 
compelled  to  make  unprofitable  sales  is  greater 
when  the  trust  is  the  only  or  the  principal  purchaser 
of  these  articles. 

The  recent  decisions  of  the  Supreme  Court  and 
other  cases  now  pending  bring  before  us  the 
problem  of  the  legality  of  the  prevalent  form  of 
combination.  It  is  generally  admitted  that  a  com- 
pany, whatever  its  magnitude,  if  it  be  one  concern, 

118 


CORPORATIONS   AND   PUBLIC  WELFARE 

if  the  stock  be  subscribed  for  that  company  alone, 
has  a  legal  existence  which  cannot  be  questioned. 
There  is  little  doubt  but  that  one  corporation  could 
buy  outright,  if  acting  in  good  faith,  all  the  prop- 
erty of  other  corporations.  But  the  usual  method 
is  very  different.  It  is  that  of  an  existing  com- 
pany, which  purchases  a  majority  interest  in  the 
stock  of  others,  or  a  company  organized  to  buy 
stocks  for  the  express  purpose  of  controlling  the 
operations  of  other  corporations. 

Holding  companies  have  not  been  a  benefit  to  the 
country.  There  is  a  normal  growth  of  combination 
in  industry  and  commerce  which  keeps  step  with 
the  increasing  demand  for  more  and  cheaper  com- 
modities. Greater  efficiency  and  economy  are  pos- 
sible with  increased  investment  of  capital,  but  the 
holding  company  is  not  the  natural  way  of  attain- 
ing that  greater  efficiency.  In  the  first  place  it  is 
contrary  to  the  general  theories  in  regard  to  cor- 
porations, according  to  which  a  concern  organized 
to  engage  in  some  branch  of  business  must  perform 
the  functions  for  which  it  was  created.  If  it  was 
created  to  manufacture  wire  nails,  its  funds  must 
be  expended  in  the  purchase  of  machinery  and  raw 
material,  and  the  payment  of  labor  for  the  making 
of  wire  nails,  and  not  in  buying  the  stock  of  some 
other  corporation.  The  holding  company  really 
produces  nothing;  it  performs  no  proper  economic 
function,  and  there  is  no  justification  for  its  organi- 
zation. 

119 


Let  us  trace  the  effect  of  the  holding  company  on 
competition.  Suppose  there  is  one  great  corpora- 
tion having  ten  million  dollars  of  capital  in  some 
line  of  industry,  and  five  minor  ones  having  two 
millions  each,  and  that  their  capital  is  commensur- 
ate with  the  value  of  their  assets.  Suppose  the 
large  establishment  seeks  to  absorb  the  whole  busi- 
ness. Without  the  device  of  the  holding  company, 
it  would  be  necessary  to  absorb  each  by  purchase 
or  to  consolidate  with  the  unanimous  consent  of  all. 
It  is  reasonably  certain  that  one  of  these  five  com- 
petitors will  wish  to  continue  in  business.  Even 
if  all  the  plants  should  be  purchased  outright,  some 
of  their  managers  who  have  ability  in  that  line  of 
business  would  start  another,  perhaps  more  thor- 
oughly equipped,  factory.  Competition  would  al- 
most certainly  survive  if  these  five  competing  com- 
panies could  only  be  eliminated  by  the  ordinary 
means  of  amalgamation.  But  the  large  corpora- 
tion, acting  as  a  holding  company  and  having  the 
power  to  acquire  the  stocks  of  other  corporations, 
can  buy  up,  for  a  little  over  a  million  dollars  each, 
a  controlling  interest  in  the  five  companies.  In- 
stead of  requiring  an  investment  of  ten  millions, 
competition  could  be  eliminated  by  an  expenditure 
of  a  little  more  than  five  millions.  The  evil  does 
not  end  there.  There  is  often  a  possibility  of  con- 
cealment which  does  not  square  with  the  best  busi- 
ness methods.  Where  interholding  of  stock  exists, 
it  is  not  always  easy  to  trace  or  detect  the  control 

120 


CORPORATIONS   AND   PUBLIC  WELFARE 

of  one  corporation  by  another,  or  to  place  responsi- 
bility upon  the  proper  parties. 

A  very  ludicrous  incident  illustrating  this  point 
occurred  in  a  Southern  city.  A  corporation  was 
established  with  the  name  of  the  Good  Oil  Company 
— not  at  all  modest  in  its  selection  of  a  name.  The 
avowed  and  widely  advertised  object  of  that  con- 
cern was  to  cut  prices  and  compete  with  the  larger 
corporation,  which  had  incurred  the  ill-will  of  the 
public.  Subsequently  it  became  known  that  for 
three  or  four  years  it  had  been  owned  by  the  very 
corporation  which  it  was  denouncing  and  against 
which  it  was  masquerading  as  a  competitor,  there- 
by capitalizing  a  pretended  independence,  when 
none  existed. 

If  it  seems  best  for  a  number  of  companies  to 
unite  because  of  ruinous  competition  or  other  good 
reason,  such  a  course  might  be  justified,  and  in 
most  circumstances  the  law  would  interpose  no 
barrier.  But  when  these  combinations  are  formed 
by  the  investment  of  half  the  amount  of  their 
capital,  and  frequently  not  by  the  payment  of 
money,  but  by  issuing  new  stock,  then  the  public 
is  not  benefited,  but,  on  the  contrary,  is  injured. 
Such  a  power  stimulates  speculative  control  of 
enterprise  rather  than  a  serious  effort  to  render 
efficient  service.  Doubtless  in  many  cases  the 
holding  company  is  dealing  fairly  with  the  public, 
and  if  declared  illegal,  and  dissolved,  in  some  in- 
stances great  injury  would  result.  But  neverthe- 

121 


CORPORATIONS  AND   THE   STATE 

less,  in  view  of  the  possibilities  for  exploiting  the 
public  which  this  form  of  organization  affords,  it 
should  be  forbidden  in  the  future,  whatever  course 
may  be  pursued  toward  those  already  in  exist- 
ence. 

The  true  conception  of  a  corporation  is  too  often 
lost  sight  of.  This  conception  was  well  expressed 
in  1809  by  Judge  Spencer  Roane  in  Currie's 
"Administrators?;.  Mutual  Assurance  Society, "  as 
follows : 1 

With  respect  to  acts  of  incorporation,  they  ought 
never  to  be  passed,  but  in  consideration  of  services  to 
be  rendered  to  the  public.  This  is  the  principle  on 
which  such  charters  are  granted  even  in  England  (1 
Bl.  Com.,  467),  and  it  holds  a  fortiori  in  this  country, 
as  our  bill  of  rights  interdicts  all  exclusive  and  sepa- 
rate emoluments  or  privileges  from  the  community, 
but  in  consideration  of  public  services.  (Art.  4.)  It 
may  be  often  convenient  for  a  set  of  associated  indi- 
viduals to  have  the  privileges  of  a  corporation  be- 
stowed upon  them;  but  if  their  object  is  merely  pri- 
vate or  selfish,  if  it  is  detrimental  to,  or  not  promotive 
of,  the  public  good,  they  have  no  adequate  claim  upon 
the  legislature  for  the  privilege. 

In  granting  valuable  powers  and  privileges  to 
these  corporate  organizations,  the  purpose  of  the 
state  is,  or  should  be,  to  promote  the  general  weal 
and  not  to  enrich  a  certain  few  individuals.  Un- 

1  Hening  &  Munford's  Virginia  Reports,  vol.  iv,  pp.  347-48. 
122 


CORPORATIONS   AND   PUBLIC  WELFARE 

less  a  corporation  can  perform  some  service  for  the 
public  which  the  individuals  composing  it  could 
not  accomplish  individually  without  these  powers, 
the  corporation  has  no  moral  right  to  existence, 
and  should  forfeit  the  special  privileges  which  it 
has  been  permitted  to  exercise. 


CHAPTER  VI 

ADVISABLE  REGULATION  OF  PRIVATE 
CORPORATIONS 

THERE  are  four  ways  in  which  the  state  can  deal 
with  corporations.  The  first  is  to  leave  them  alone, 
and  allow  them  free  course.  The  second,  is  to  de- 
stroy them,  the  third,  to  regulate  them,  and  the 
fourth,  to  acquire  and  own  them.  The  first  meth- 
od suggested  is  out  of  the  question.  It  would  be 
taking  a  long  step  backward  after  all  these  years 
of  beneficial  regulations  to  give  corporations  full 
and  unrestricted  control  of  the  respective  branches 
of  industry  and  transportation  in  which  they  are 
engaged.  It  would  afford  them  a  power  deleterious 
to  the  public  welfare.  To  destroy  them,  as  sug- 
gested in  the  second  plan,  would  amount  to  a 
declaration  that  to  conduct  operations  on  a  large 
scale  is  not  desirable.  The  fourth  method,  that  of 
acquiring  and  operating  large  combinations,  has 
its  advocates.  Many  believe  that  the  great  trans- 
portation lines  will  be  gradually  acquired  by  the 
government,  and  that  later  the  state  will  take  over 
industrial  establishments,  one  by  one  according  to 
magnitude. 

One  of  the  numerous  objections  frequently  urged 
124 


ADVISABLE   REGULATIONS 

against  state  ownership  is  especially  important, 
and  that  is  the  political  effect.  Last  winter  a 
prominent  legislator,  who  is  very  careful  in  ex- 
pressing his  views,  said  that  it  was  only  a  question 
of  time  until  the  post-office  employees  of  this  gov- 
ernment, including  those  engaged  in  rural  free 
delivery,  would  control  national  legislation.  This 
is  a  very  radical  statement,  to  be  sure,  but  never- 
theless the  creation  of  great  classes  of  public  em- 
ployees is  not  for  the  best  interests  of  the  country. 
Suppose  all  the  railroad  employees,  1,699,420  in 
number,  according  to  a  recent  statement  of  the 
Interstate  Commerce  Commission,  should  become 
employees  of  the  government.  They  would  natur- 
ally manifest  a  zealous  interest  in  raising  their 
wages  and  obtaining  special  privileges  which  they 
could  not  secure  under  private  management.  They 
could  also  combine  with  other  public  servants  in 
forming  a  powerful  political  organization  to  ad- 
vance their  own  interests. 

The  natural  tendency  in  a  wholesome  democ- 
racy is  to  form  two  leading  political  parties  divided 
on  important  questions  such  as  the  tariff,  currency, 
or  state's  rights.  Political  contests  are  waged  be- 
tween these  two  parties  on  great  vital  issues.  If  a 
new  idea  assumes  importance,  one  party  or  the 
other  adopts  it.  But  the  existence  of  a  number  of 
political  groups,  such  as  appear  in  France,  Ger- 
many, or  England,  paves  the  way  for  political  bar- 
gaining. One  element  in  the  national  legislature 

125 


CORPORATIONS  AND   THE   STATE 

will  give  its  support  to  the  party  in  power  in  re- 
turn for  concessions.  The  predominant  party,  in 
order  to  secure  its  assistance,  is  prone  to  enact 
legislation  to  favor  this  group,  without  sufficiently 
considering  the  best  interests  of  the  whole  people. 
Nothing  could  be  more  serious  in  its  effect  upon 
the  workings  of  our  government  than  to  introduce 
into  our  political  life  classes  of  persons  who  seek 
to  promote  their  own  interests,  instead  of  dividing 
on  the  great  questions  before  the  people.  If  a 
large  group  of  public  employees  should  enter  poli- 
tics, other  groups  would  naturally  organize  in  self- 
protection.  We  would  have  not  merely  the  public 
employees'  party,  but  the  farmers'  or  the  grange 
party.  Teachers  in  public  schools  might  realize 
that  they  could  not  obtain  sufficient  recognition 
without  forming  a  political  organization  of  their 
own,  and  trading  their  support  to  the  leaders  of 
other  political  organizations  in  return  for  their 
assistance.  Great  armies  of  public  employees,  as- 
sured of  permanent  situations  and  alert  in  im- 
proving their  own  condition  at  the  expense  of  the 
general  public,  would  be  most  demoralizing  in  a 
popular  government  like  our  own.  The  assertion 
of  individual  interests  to  the  detriment  of  national 
aims  and  aspirations  is  even  now  too  plainly  ap- 
parent and  the  adoption  of  any  policy  which  would 
accentuate  this  tendency  should  most  certainly  be 
avoided. 

Another  potent  objection  to  government  owner- 
126 


ADVISABLE   REGULATIONS 

ship  is  that  the  management  of  great  enterprises 
would  be  less  efficient  under  government  than  under 
private  control.  Whatever  honest  pride  we  may 
take  in  the  success  of  our  national,  state,  or  muni- 
cipal governments,  we  are  nevertheless  compelled 
to  admit  the  deleterious  effect  of  political  manipu- 
lation. Other  well-known  objections  would  be  the 
difficulty  of  maintaining  a  proper  standard  of  pro- 
motion based  upon  merit  and  ability,  and  the  dis- 
couragement of  that  individual  initiative  which  is 
always  necessary  in  promoting  the  progress  of  a 
great  people. 

It  thus  appears  that  the  better  method  of  dealing 
with  corporations  is  by  regulation,  rather  than  by 
government  ownership.  The  aim  of  regulation 
should  be  to  subserve  the  public  welfare  by  the 
adoption  of  such  laws  and  the  exercise  of  such 
supervision  as  will  render  corporations,  great  or 
small,  helpful  agencies  for  meeting  the  demands  of 
an  advancing  civilization.  Our  aim  should  be  to 
preserve  to  the  public  what  is  good,  while  elimi- 
nating that  which  is  evil.  This  requires  intelli- 
gent consideration  and  fair  treatment,  both  for 
the  individual  citizen,  and  the  corporation.  To 
abolish  all  large  corporations,  or  to  impose  unnat- 
ural or  drastic  restrictions  upon  them,  is  as  un- 
wise as  to  give  them  a  free  hand.  Unreasoning 
clamor  cannot  aid  in  meeting  the  requirements  of 
the  situation.  Too  much  emphasis  cannot  be  laid 
upon  the  fact  that  what  is  most  needed  is  an  intelli- 

127 


CORPORATIONS  AND   THE  STATE 

gent  understanding  of  the  underlying  principles 
which  are  essential  to  the  development  of  com- 
merce and  industry.  To  this  should  be  added  the 
necessity  for  providing  efficient  and  impartial  ad- 
ministrative agencies  to  execute  the  regulations 
suggested  by  a  judicious  mastery  of  the  problem. 

Heretofore,  laws,  both  state  and  national,  have 
given  too  much  attention  to  form,  and  not  enough 
to  actual  results.  Combinations  have  been  dis- 
solved in  one  locality  only  to  reappear  in  another, 
in  a  form  more  monopolistic  than  before.  For 
instance,  the  North  River  Sugar  Company  was 
dissolved  by  order  of  the  New  York  State  Courts. 
It  immediately  reincorporated  under  the  laws  of 
New  Jersey,  transferred  its  main  office  to  that 
state,  and  continued  to  do  business  as  before. 
The  State  of  Ohio  proceeded  against  the  Standard 
Oil  Company  and  a  decree  was  entered  by  the 
State  Supreme  Court  for  its  dissolution.  The 
company  continued  in  a  state  of  partial  disorgani- 
zation for  some  years,  and  then  was  incorporated 
under  the  laws  of  New  Jersey.  The  result  was 
distinctly  injurious  to  Ohio.  A  large  office  force 
and  some  of  the  plants  of  the  corporation  were 
removed  to  localities  where  the  laws  were  more 
favorable. 

Thus  far  public  regulation  has  given  undue 
attention  to  the  prevention  of  agreements  in  re- 
straint of  trade,  which  limit  competition  or  pro- 
duction, while  neglecting  to  provide  adequate 

128 


ADVISABLE   REGULATIONS 

means  for  the  punishment  of  palpably  dishonest 
and  illegal  practices,  such  as  the  misappropriation 
of  assets  by  corporate  officers,  the  issuance  of 
fraudulent  or  watered  stock,  the  declaration  of  un- 
earned dividends  and  the  adoption  of  oppressive 
and  unfair  methods  to  destroy  competition.  These 
and  other  devices  employed  by  corporations  make 
monopoly  possible  and  enable  their  promoters  to 
gain  unfair  advantages.  The  personal  delinquen- 
cies of  corporate  managers  and  their  offenses 
against  the  law  have  received  only  minor  atten- 
tion, while  the  impersonal  corporation  has  been 
subject  to  prosecutions  and  fines  without  realiza- 
tion of  the  fact  that  a  more  just  and  effective 
way  is  to  imprison  the  guilty  corporate  officers. 

The  common  law  for  many  years  has  forbidden 
contracts  in  restraint  of  trade,  but  for  more  than 
a  century,  the  rulings  of  the  courts  have  considered 
the  reasonableness  of  such  agreements  or  contracts, 
and  their  effect  upon  the  public  welfare. 

In  the  early  days  the  decisions  of  the  English 
courts  displayed  much  severity  in  punishing  those 
entering  into  contracts  in  restraint  of  trade.  Not 
long  after  the  year  1400,  a  judge  declared  illegal 
an  agreement  by  which  a  party  to  the  contract  was 
not  to  engage  in  a  certain  trade,  and  expressed  his 
regret  that  those  guilty  of  making  the  agreement 
were  not  before  him,  so  that  he  could  send  them  to 
prison.  But  this  view  was  later  modified  in  Eng- 
land, as  well  as  in  our  own  country.  In  the  Court 
10  129 


CORPORATIONS  AND  THE  STATE 

of  Appeals  of  New  York,  a  case  arose  where  a  man- 
ufacturer of  matches  had  agreed  that  for  ninety- 
nine  years  he  would  not  engage  in  this  business, 
except  in  the  states  of  Nevada  and  Montana.1  The 
contract  was  evidently  drawn  by  an  ingenious  law- 
yer, with  a  view  to  meeting  the  former  decisions 
of  the  courts  in  that  state.  The  Court  of  Appeals 
decided  that  the  contract  was  valid,  notwithstand- 
ing the  fact  that  the  operations  of  the  manufacturer 
were  to  be  confined  to  two  of  the  minor  states  of 
the  Union.  This  decision  displays  an  application 
of  general  principles  to  facts,  apparently  violative 
of  the  spirit  of  the  rule. 

The  courts  have  generally  decided  that  those 
contracts  in  restraint  of  trade  by  which  a  person 
binds  himself  not  to  pursue  his  calling  in  certain 
localities  are  valid.  They  have  been  more  severe  in 
regard  to  agreements  relating  to  time.  If  a  man 
is  forbidden  by  a  contract  to  engage  in  business  in 
a  certain  city  or  state,  he  still  has  that  liberty  in 
other  localities,  but  in  accordance  with  public  policy 
it  has  been  thought  best  to  make  the  rule  more 
strict  when  he  agrees  to  engage  in  business  only 
after  the  expiration  of  a  certain  number  of  years, 
or  to  withdraw  entirely  because  that  not  only  may 
deprive  him  of  a  livelihood,  but  it  also  deprives  the 
community  of  the  benefit  of  his  endeavors. 

In  this  connection  let  us  consider   briefly  the 

1  Diamond  Match  Co.  v.  Roeber,  106  N.  Y.,  473. 
130 


ADVISABLE   REGULATIONS 

Sherman  Antitrust  Act  of  1890.  The  letter  and 
the  spirit  of  that  act  is  to  make  every  contract, 
combination,  or  conspiracy  in  restraint  of  trade 
illegal.  This  law  was  supplemented  in  1902  by  an 
act  to  expedite  the  hearings  and  annually  an  appro- 
priation is  made  by  Congress  for  the  express  pur- 
pose of  enforcing  the  provisions  of  the  Sherman 
law. 

A  considerable  number  of  lawyers  and  others 
maintain  that  there  is  little  difference  between  this 
act  and  the  common  law,  and  that  illegal  combina- 
tions might  more  readily  be  prevented  if  the  Sher- 
man law  had  never  been  enacted.  However,  it 
differs  from  the  common  law  in  important  particu- 
lars, or,  at  least,  makes  more  definite  the  applica- 
tion of  its  principles.  It  seeks  to  define  the  acts 
forbidden  and  provides  remedies  as  follows: 

1.  The  Federal  Government  undertakes  the  pros- 
ecution of  offenders. 

2.  Acts  in  restraint  of  trade  or  for  the  creation 
of  a  monopoly  or  an  attempt  to  create  a  monopoly 
are  made  misdemeanors.    Specific  remedies  for  the 
enforcement  of  the  act  are  provided,  such  as  the 
right  to  apply  for  an  injunction  to  restrain  viola- 
tions thereof. 

3.  Other  parties  than  the  defendant  corporation 
may  be  brought  into  court  with  a  view  to  reaching 
in  one  proceeding  a  comprehensive  settlement  of 
the  whole  controversy. 

4.  Property  owned  under  any  contract  or  by  any 

131 


CORPORATIONS  AND   THE   STATE 

combination,  or  pursuant  to  any  conspiracy,  when 
in  the  course  of  transportation  from  one  state  to 
another,  or  to  a  foreign  country,  shall  be  forfeited 
to  the  United  States. 

5.  Any  person  injured  may  recover  threefold  the 
damages  by  him  sustained. 

The  prevention  of  monopoly  is  of  the  utmost  im- 
portance, but  it  should  be  borne  in  mind  that  the 
centralization  of  an  industry  or  industries  under 
one  control  may  benefit  rather  than  injure  the  pub- 
lic. What  is  especially  requisite  is  fair  dealing 
on  the  part  of  large  concerns  toward  investors,  con- 
sumers, and  employees,  and  also  that  check  which 
the  possibility  of  competition  imposes  against  ex- 
orbitant prices. 

If  a  large  combination  can  produce  and  sell 
articles  at  a  less  price  than  its  competitors,  and 
employs  no  unfair  methods  against  them,  is  not  the 
public  benefited  rather  than  injured?  What  should 
be  prohibited  is  the  opportunity  for  oppression  or 
dishonest  practices  which  give  to  the  large  combi- 
nation an  illegitimate  advantage. 

Numerous  salutary  regulations  for  the  control  of 
corporations  have  already  been  suggested  in  pre- 
vious chapters.  These  and  others  will  now  be  enu- 
merated in  summary  form.  Among  regulations 
not  to  be  adopted,  or  of  doubtful  practicabil- 
ity, is  limitation  of  size,  or  the  attempt  to  main- 
tain competition  where  it  is  unnatural  or  unprofit- 
able. No  popular  fallacy  has  caused  greater  injury 

132 


ADVISABLE   REGULATIONS 

in  the  progress  of  industry  than  the  idea  that  com- 
petition in  itself  is  an  all-pervading  benefit,  and 
under  all  circumstances  can  be  depended  upon  to 
promote  the  public  good.  In  some  cities  there  are 
two  telephone  systems,  so  that  the  user  must  have 
two  instruments  and  be  subjected  to  much  incon- 
venience. Generally  speaking,  a  considerably 
larger  price  is  paid  for  the  use  of  the  two  systems 
than  for  one.  Where  there  are  two  companies  there 
is  a  duplication  of  office  force  and  of  equipment. 
While  the  total  cost  of  installing  and  operating  the 
two  is  not  double  the  cost  of  one  complete  system, 
it  is  very  much  in  excess,  and  upon  this  additional 
outlay  interest  must  be  earned.  It  is  sometimes 
asserted  that  if  the  price  of  the  service  be  reduced 
by  the  competition  between  the  two  companies, 
and  one  of  them  is  eventually  driven  out  of  busi- 
ness, the  public  will  not  be  injured.  But  in  this 
case,  the  capital  invested  in  the  one  is  lost,  and  it 
is  a  grave  mistake  to  suppose  that  any  favorable 
result  accrues  when  money  actually  and  honestly 
expended  is  lost,  especially  if  the  investment  is 
made  in  good  faith. 

It  is  to  be  hoped  that  industrial  establishments 
will  never  attain  the  same  degree  of  monopoly  that 
naturally  belongs  to  the  railway  or  other  public  ser- 
vice corporation.  The  word  "monopoly,"  as  indi- 
cated by  its  derivation,  means  the  sole  sale  of  an 
article,  or  the  sole  control  of  some  branch  of  indus- 
try or  trade.  This  can  only  be  the  result  of  a  grant 

133 


CORPORATIONS   AND   THE   STATE 

from  a  sovereign  power,  or  be  created  by  agree- 
ment or  combination  between  all  competitors.  Thus 
far  in  the  United  States,  no  combinations,  except 
those  which  are  natural  monopolies,  have  secured 
such  absolute  control.  Competitors  will  always 
enter  the  field,  if  profits  are  too  high,  and  the 
danger  of  being  driven  out  of  business  by  unfair 
means  is  not  too  great. 

It  goes  without  saying  that  all  advantages  tend- 
ing toward  monopoly  should  be  strictly  forbidden. 
The  progress  made  in  the  virtual  abolition  of  rail- 
road rebates,  formerly  so  common,  should  be  fol- 
lowed by  the  complete  elimination  of  every  kind 
of  discrimination  between  shippers.  Such  dis- 
crimination can  still  be  effected  in  the  furnishing 
of  cars,  in  preferential- switching  privileges,  and 
by  devious  methods  difficult  to  detect,  all  of  which 
afford  abundant  opportunity  for  the  continuance 
of  preferences  to  favored  concerns.  Formerly 
most  of  the  profits  of  some  concerns  consisted  of 
rebates  from  railway  companies,  without  which 
they  would  have  been  unable  to  do  business.  It 
is  impossible  to  conceive  of  a  more  demoralizing 
system  than  that  whereby  railways  are  able  to 
build  up  the  business  of  one  concern  and  to  cripple 
or  destroy  the  business  of  others.  Stated  in  a 
few  words,  it  is  a  violation  of  that  equality  of 
opportunity,  which  is  as  dear  to  the  American 
citizen  as  is  his  liberty  or  any  right  enjoyed  under 
free  government.  It  should  be  said  that  no  one 

134 


ADVISABLE   REGULATIONS 

rejoices  more  over  the  elimination  of  rebates  than 
the  traffic  manager  of  the  railroad.  In  part,  the 
public  has  been  responsible  for  such  practices,  be- 
cause it  insisted  that  competition  should  exist  in 
enterprises  where  it  does  not  belong. 

Regulations  have  been  suggested  for  the  preven- 
tion of  oppression  or  unfair  competition.  Some  of 
them  are  not  practicable  or  desirable  under  ordinary 
conditions,  though  circumstances  might  exist  that 
would  make  them  necessary.  Professor  John  B. 
Clark,  in  his  "Control  of  Trusts,"  has  suggested 
three  regulations  which  should  be  applied  to  cor- 
porations. The  first  is  to  prohibit  a  concern  from 
selling  its  products  at  a  lower  price  in  the  territory 
of  a  competitor  than  elsewhere.  Under  extreme 
circumstances,  this  might  prove  a  reasonable  and 
effective  regulation,  but  its  weakness  is  that  it  is 
necessary  to  deal  with  the  motive  for  cutting  prices. 
How  can  the  line  be  drawn  between  the  different 
zones  in  which  sales  may  be  made?  Suppose  a  cor- 
poration sells  its  product  for  less  in  one  locality  than 
in  another.  It  would  be  difficult  for  any  public 
official  to  decide  that  the  reason  for  the  lower  price 
is  the  presence  there  of  a  competitor  which  the  cor- 
poration is  trying  to  drive  out.  The  attempt  to  do 
this  would  involve  a  degree  of  espionage  and  de- 
tail that  would  make  the  general  application  of 
such  a  plan  impracticable.  If,  however,  specific 
instances  of  cutting  prices  should  be  glaring  and 
readily  ascertainable,  and  doubtless  such  has  been 

135 


CORPORATIONS  AND   THE   STATE 

the  practice  of  some  corporations,  such  a  law  might 
be  passed  and  made  effective. 

In  1910  Congress  passed  a  law  of  similar  nature, 
which  it  is  hoped,  will  have  a  salutary  effect.  In- 
stances had  been  reported,  in  which  railway  com- 
panies had  lowered  their  rates  in  competition  with 
boat  lines  until  the  latter  were  driven  off  the 
rivers,  and  when  this  had  been  accomplished,  had 
raised  them  again.  In  one  case  the  rate  by  water 
between  terminal  points  was  fifty  cents  per  hun- 
dred pounds,  and  by  rail  seventy-five  cents.  The 
railroad  reduced  its  rate  to  twenty-five  cents; 
traffic  was  driven  off  the  river;  and  then  the  rail- 
way rate  was  raised  not  to  seventy-five  cents,  but 
to  one  dollar.  To  remedy  this  evil,  a  provision  was 
inserted  in  the  new  Mann-Elkins  Law  of  1910  to 
the  effect  that  when  a  railway  lowered  its  rates  in 
competition  with  a  waterway  it  could  not  raise 
them  again,  unless  it  could  be  shown  that  the 
lowering  was  for  an  object  other  than  the  destruc- 
tion of  competition.  Practically,  the  same  regula- 
tion is  enforced  in  England. 

Another  of  Professor  Clark's  suggestions,  is  that 
a  corporation  manufacturing  and  selling  a  number 
of  articles  in  competition  with  a  concern  making 
only  one,  should  be  prohibited  from  cutting  prices 
on  that  one  article,  in  order  to  drive  out  the  com- 
petitor, while  recouping  itself  for  the  loss  by  main- 
taining prices  on  its  other  products.  Here,  as  be- 
fore, is  involved  the  same  difficulty  of  ascertaining 

136 


ADVISABLE   REGULATIONS 

just  what  the  motive  for  the  reduction  of  price  may 
be,  whether  it  is  not  due  to  economies  in  produc- 
tion or  distribution,  rather  than  to  an  effort  to 
eliminate  competition. 

Professor  Clark's  third  suggestion  is  more  prac- 
ticable, and  is  intended  to  prohibit  factor's  agree- 
ments, by  which  trusts  have  been  able  to  prevent 
retailers  from  selling  the  goods  of  their  competi- 
tors by  threatening  to  withhold  their  own  brands 
which  are  good  sellers  and  yield  the  retailer  a 
good  profit.  The  suggestion  is  that  no  large  estab- 
lishment shall  refuse  to  sell  to  any  customer.  Of 
course,  circumstances  might  arise,  where  by  rea- 
son of  extreme  demand,  a  producer  could  not  fill 
the  orders  of  all  customers,  but  in  cases  where  the 
threat  of  refusal  to  sell  is  plainly  to  compel  the 
retailer  not  to  handle  the  goods  of  a  competitor  it 
would  seem  that  such  a  regulation  would  prove 
practicable  and  beneficial. 

Of  all  regulations  which  promise  helpful  results 
publicity  should  be  placed  first.  The  most  com- 
mon argument  against  greater  publicity  is  that 
the  public  has  no  more  right  to  know  about  a  cor- 
poration's affairs  than  about  the  affairs  of  a  pri- 
vate individual.  Such  a  view  shows  a  radical 
misconception  of  the  nature  of  a  corporation.  A 
business  organization  which  is  incorporated  is  a 
public  agency  invested  with  public  responsibility. 
The  basis  for  its  existence  is  not  merely  the  oppor- 
tunity afforded  its  members  to  make  profits,  but 

137 


CORPORATIONS   AND   THE  STATE 

its  ability  to  perform  a  service  more  efficiently 
than  any  individual.  At  first,  it  may  not  seem 
desirable  to  impose  this  rule  upon  all  the  smaller 
corporations,  but  when  they  assume  any  consid- 
erable size  there  is  no  other  adequate  way  to  pro- 
tect investors,  creditors,  and  others  who  are  af- 
fected. If  there  is  any  one  reform  to  which  we 
may  look  forward  with  certainty,  it  is  that  a 
larger  degree  of  publicity  will  be  required  in  the 
near  future.  It  should  begin  with  the  stock  sub- 
scription which,  as  already  suggested,  has  been 
regulated  elsewhere  in  one  of  two  ways.  The  first 
is  the  issuance  of  a  prospectus  fully  disclosing  the 
methods  of  the  subscription,  together  with  the 
property  to  be  taken  over  and  its  value.  The 
other  is  official  supervision,  to  see  that  the  actual 
subscriptions  are  paid  in  cash  and,  if  property  is 
to  be  accepted  as  part  of  the  subscription,  to  make 
sure  that  such  property  is  received  only  at  its  cor- 
rect valuation.  Whichever  of  these  methods  is 
adopted  in  this  country  depends  in  great  measure 
upon  the  degree  in  which,  according  to  the  judg- 
ment of  the  legislature,  the  gullible  and  the  care- 
less should  be  protected  against  themselves. 

The  extent  to  which  the  overtrustful  can  be  im- 
posed upon  is  forcibly  illustrated  by  the  recent 
arrests  in  New  York  City  of  various  fraudulent 
users  of  the  mails.  The  statement  was  made  in 
these  cases,  that  the  public  had  been  robbed  of 
$4,000,000  by  their  operations,  and  by  the  devices 

138 


ADVISABLE   REGULATIONS 

of  others  associated  with  them  who  advertised 
alluring  schemes  in  the  newspapers  and  through 
circulars.  In  some  towns  after  the  disclosures  it 
seemed  as  if  most  of  the  people  were  anxious  to 
know  what  would  become  of  one  or  more  of  these 
fake  institutions  to  which  they  had  entrusted  their 
money.  Men  and  women,  unfamiliar  with  business 
and  well  advanced  in  years,  could  not  believe  that 
these  glowing  representations  were  untrue.  An 
advertisement  was  recently  mailed  by  a  real  estate 
company  in  an  Eastern  city  to  thousands  of  school- 
teachers inviting  the  purchase  of  bonds  of  the 
face  value  of  $100  each.  The  company  had  neither 
capital  nor  reserve,  and  indeed  had  no  resource 
for  payment  except  the  profits  from  speculation  in 
the  purchase  and  sale  of  real  estate.  Possibly  its 
promoters  expected  success,  but  the  visionary 
with  no  knowledge  of  financiering  may  be  as  dan- 
gerous as  the  worst  knave.  One  of  the  officials 
of  the  Post  Office  Department  has  asserted  that 
the  amounts  which  could  be  realized  by  mail 
order  schemes  of  insignificant  proportions  aver- 
aged $25,000  before  fraud  orders  were  issued. 
The  Department  has  also  compiled  a  statement 
showing  that  in  the  year  beginning  July  1,  1910, 
$26,000,000  was  filched  from  the  public  by  con- 
cerns convicted  of  fraudulent  use  of  the  mails. 
Prosecutions  are  pending  against  concerns  whose 
receipts  have  aggregated  more  than  $50,000,000; 
while  the  total  amount  annually  abstracted  from 

139 


CORPORATIONS  AND   THE   STATE 

the  people  by  such  methods  is  conservatively  esti- 
mated at  the  enormous  sum  of  $250,000,000. 

These  facts  are  worthy  of  consideration  in  de- 
vising measures  to  compel  publicity  when  stock 
subscriptions  are  solicited.  If  the  government  is 
to  exercise  any  measure  of  guardianship  for  the 
protection  of  those  who  are  credulous,  and  who  in- 
vest without  due  care  and  judgment,  it  should 
adopt  the  very  strictest  regulations,  such  as  those 
in  force  in  Germany.  There  every  dollar  of  the 
subscription  must  be  accounted  for  and  must  be 
based  upon  substantial  values.  An  excellent  sug- 
gestion is  also  to  be  found  in  the  proposed  law  for 
voluntary  federal  incorporation,  already  referred 
to,  which  contains  a  provision  that  when  property 
is  turned  over  to  a  corporation,  an  appraisal  must 
be  made,  and  this  appraisal  must  be  approved  by 
the  chief  of  the  Bureau  of  Corporations. 

Publicity  should  also  be  enforced  in  the  mat- 
ter of  increasing  capitalization,  which  is  sub- 
ject to  the  same  dangers  as  original  stock  sub- 
scriptions. Here  again  a  confiding  public  is 
likely  to  be  imposed  upon.  Such  regulation  is  also 
necessary  because  of  the  greater  possibility  for 
fraud  by  the  managers  of  going  concerns,  especi- 
ally if  their  business  can  be  made  to  show  a  profit. 
The  dishonest  promoter  is  able  to  float  securities 
for  millions  of  dollars  on  property  worth  at  most 
only  a  few  hundred  thousand.  This  can  be  more 
readily  accomplished  by  means  of  a  holding  com- 

140 


ADVISABLE  REGULATIONS 

pany.  An  example  of  this  is  to  be  found  in  the 
financing  of  the  street  railways  of  New  York  City, 
where  there  were  six  or  seven  corporations,  one 
within  the  other,  each  in  turn  having  an  inflated 
capital,  until  at  last  the  whole  system  toppled  over 
because  of  its  enormous  overcapitalization.  The 
absence  of  publicity,  with  the  resultant  opportunity 
for  dishonesty,  is  the  beginning  of  most  of  the 
evils  in  the  present  mismanagement  of  corpora- 
tions— at  least,  from  the  standpoint  of  the  stock- 
holder and  the  creditor,  and,  indirectly,  from  that 
of  the  public  at  large. 

As  regards  dividends,  a  regulation  should  be 
adopted  to  make  sure  that  they  shall  not  be  declared 
by  a  corporation  except  from  net  earnings  after  a 
careful  investigation,  so  that  the  capital  may  not 
be  depleted  for  the  purpose  of  paying  a  fictitious 
profit.  The  eager  desire  of  corporate  managers  to 
make  a  favorable  showing,  combined  with  the  in- 
sistence of  the  stockholders  who  wish  a  return 
upon  their  investment,  promote  the  payment  of 
unauthorized  dividends.  This  phase  of  corporate 
management  is  not  characterized  by  the  same  dis- 
honesty as  other  transactions,  but  is  equally  sub- 
versive of  proper  control  and  thus  demands  state 
supervision.  The  laws  relating  to  national  banks, 
the  dividends  of  which  are  carefully  limited,  fur- 
nish an  example  and  a  pattern  for  any  plan  of 
control  that  may  be  adopted. 

Another  regulation  would  be  the  limitation  of 
141 


CORPORATIONS  AND   THE   STATE 

the  activities  of  a  corporation  to  definite  fields 
to  be  prescribed  by  its  charter,  though  the  prac- 
tice of  granting  blanket  charters  is  not  so  preva- 
lent as  it  was  some  years  ago.  Such  a  regulation 
is  in  the  interest  not  only  of  competitors  in  those 
branches  of  business  in  which  a  corporation  might 
extend  its  operations,  but  also  in  the  interest  of 
the  stockholders  of  the  corporation  itself,  who 
must  face  the  danger,  always  imminent,  that  when 
a  corporation  goes  out  of  its  legitimate  sphere, 
just  as  when  a  man  undertakes  to  do  something 
with  which  he  is  unfamiliar,  failure  will  be  the 
result.  Another  evil  to  be  obviated  by  this  regu- 
lation, is  the  possible  acquisition  of  an  undue 
amount  of  power  by  corporations  which  enlarge 
the  scope  of  their  operations.  A  good  illustration 
is  the  mining  and  sale  of  coal  by  railroads  in  com- 
petition with  other  operators,  a  practice  which, 
because  of  its  possibilities  for  abuse,  was  prohibi- 
ted by  act  of  Congress  in  1906. 

A  much  needed  reform  to  be  inaugurated  is  that 
penal  statutes  should  be  distinct  and  should  forbid 
only  that  which  is  subversive  of  public  interest. 
If  an  amendment  to  the  Sherman  Act  is  adopted, 
it  should  make  perfectly  clear  what  is  forbidden 
by  the  statute.  As  a  general  rule  criminal  intent 
should  be  the  basis  of  prosecution,  but  in  many 
instances  either  the  proof  of  intent  is  so  difficult 
to  obtain  or  an  offense  is  so  injurious  in  itself  that 
this  rule  cannot  be  said  to  have  universal  applica- 

142 


ADVISABLE   REGULATIONS 

tion.  Laws  pertaining  to  business  are  frequently 
quite  as  necessary  to  prevent  carelessness  and 
inaccuracy  as  to  punish  the  gravest  moral  turpi- 
tude. This  is  especially  true  in  the  business  of 
banking  where  errors,  which  are  not  the  result  of 
criminal  disposition,  may  cause  widespread  disas- 
ter. It  is  especially  necessary  to  avoid  an  undue 
multiplication  of  penal  statutes.  They  should  not 
be  hastily  passed  and  should  be  limited  to  the  pun- 
ishment of  offenses  which  consist  of  fraud  or 
dishonesty,  or  are  injurious  to  normal  business 
development.  In  order  to  secure  an  efficient  en- 
forcement of  the  law  and  to  maintain  respect  for 
it,  unnecessary  statutes,  or  those  which  cannot  be 
enforced,  should  always  be  avoided.  The  whole 
history  of  the  relation  of  the  state  to  industry  is 
interspersed  with  attempts  to  give  direction  by 
statute  to  tendencies  and  operations  which  are  out- 
side the  domain  of  legal  regulation.  It  is  unneces- 
sary to  add  that  laws  which  are  impossible  of 
enforcement,  as  well  as  those  which  are  not  sus- 
tained by  public  opinion,  do  not  belong  upon  the 
statute  book.  Penalties  imposed  upon  the  corpora- 
tion itself  may  have  a  deterrent  effect,  but  fre- 
quent violations  of  the  law  will  not  cease  until  the 
rule  is  established  that  guilt  is  personal.  If  pun- 
ishment is  enforced  merely  by  fines,  a  corporation 
is  tempted  to  gamble  upon  the  chances  of  increas- 
ing profits  by  violating  the  law  and  paying  the  fine 
if  detected,  a  venture  which  would  not  be  taken 

143 


CORPORATIONS  AND   THE  STATE 

by  a  corporate  officer  if  imprisonment  were  the 
penalty.  In  brief,  no  act  should  be  made  an  offense 
unless  it  has  that  degree  of  culpability  which  de- 
serves condign  punishment  and  when  the  offense 
is  once  committed  the  penalty  should  be  strictly 
enforced. 

Progress  has  been  so  rapid  and  so  many  unfore- 
seen changes  have  occurred  that  we  cannot  cor- 
rectly forecast  the  regulations  which  will  be  re- 
quired in  the  future.  Numerous  propositions  are 
pending  to  control  the  prices  of  the  products  of 
industrial  corporations  in  the  same  manner  as 
transportation  charges  are  now  controlled.  There 
are  obvious  objections  to  this  course.  It  would  be 
almost  impossible  for  any  official  bureau  to  deter- 
mine what  are  reasonable  prices  for  the  almost 
unlimited  number  of  articles  made  in  factories, 
some  of  which  are  produced  in  a  thousand  forms. 
Again  prices  are  constantly  changing  with  the 
different  conditions  of  the  market  and  the  vary- 
ing cost  of  labor  and  raw  material.  In  any  event 
it  would  seem  essential  that  supervision  be  exer- 
cised over  only  a  few  basic  articles,  such  as  pig 
iron  and  steel  billets  and  staple  forms  of  cotton 
and  woolen  yarns.  An  almost  endless  complica- 
tion would  result  from  the  necessity  of  fixing 
prices  not  only  at  different  times  but  in  different 
localities.  Furthermore  the  prevailing  high  prices 
of  the  necessaries  of  life,  about  which  there  is  so 
much  complaint,  are  due  not  so  much  to  the  exor- 

144 


ADVISABLE   REGULATIONS 

bitant  charges  of  combinations  as  to  the  profits  of 
middlemen.  This  fact  not  only  creates  a  doubt  as 
to  whether  high  prices  are  generally  caused  by 
combinations  but  also  suggests  the  unlimited  scope 
of  governmental  action  if  official  control  of  prices 
is  attempted.  Such  control  is  to  be  considered 
only  in  case  industrial  or  commercial  organiza- 
tions gain  a  larger  degree  of  monopoly  in  some 
specific  branch  of  industry  or  trade  than  has  yet 
been  attained  or  is  likely  to  be  attained  in  the 
near  future. 

It  is  conceivable  that  in  a  few  years  it  will  be 
found  necessary  to  enact  laws  limiting  the  profits 
of  corporations.  Whenever  this  form  of  associa- 
tion assumes  still  greater  prominence  in  our  busi- 
ness life,  laws  might  be  framed  under  which  cor- 
porations would  be  required  to  turn  over  to  the 
state  a  percentage  of  their  profits,  if  public  exami- 
nation disclosed  that  they  were  excessive.  A  tax 
has  recently  been  imposed  upon  the  net  earnings 
of  corporations,  and  it  is  quite  probable  that  this 
levy  may  be  increased  in  the  future.  A  twofold 
basis  for  such  a  regulation  would  be  the  increasing 
proportion  of  industrial  and  commercial  operations 
performed  by  corporations,  and  the  increasing 
value  of  the  privileges  which  they  enjoy. 

Any  hard  and  fast  requirement  that  all  profits 
above  a  certain  fixed  percentage  should  go  to  the 
state  would  not  be  advisable,  because  of  the  differ- 
ence in  their  magnitude  and  in  the  profitableness 
n  145 


CORPORATIONS   AND   THE  STATE 

of  their  business.  Indeed,  in  the  development  of 
systems  of  taxation  graduated  levies  have  very 
generally  been  adopted  and  essential  distinctions 
made  in  accordance  with  the  source  or  quality  of 
income.  It  should  be  said  that  under  any  such 
system  the  necessity  of  encouraging  earnest,  care- 
ful effort  from  the  manager,  should  not  be  over- 
looked. That  incentive  would  be  destroyed  if 
there  were  a  limitation  of  the  profits  to  a  fixed 
percentage,  but  it  would  exist  in  case  profits  in 
excess  of  such  a  limit  were  divided  between  the 
corporation  and  the  state.  In  some  countries  regu- 
lations of  a  similar  nature  have  been  adopted  for 
certain  public  service  corporations.  Increased 
dividends  might  also  be  allowed  in  some  cases  if 
charges  were  lowered.  This  creates  a  partnership 
between  the  corporation  and  the  state,  which  is 
of  mutual  benefit. 

A  plan  for  the  limitation  of  the  profits  of  corpora- 
tions as  compared  with  the  control  of  prices  has  the 
merit  of  simplicity.  The  former  would  be  compara- 
tively easy,  while  the  latter  involves  the  existence 
of  a  much  more  extensive  bureaucracy  and  a  con- 
stant interference  and  minuteness  of  control  which 
does  not  seem  possible  of  administration. 

When,  however,  with  improved  regulations  and 
more  settled  business  methods  the  success  of  the 
corporation  is  less  uncertain  than  it  is  now,  we 
may  expect  to  apply  to  its  management  rules  which 
would  now  seem  to  be  ill-advised.  Under  present 

146 


ADVISABLE   REGULATIONS 

conditions,  owing  to  the  fact  that  the  chances  for 
business  success  are  so  unequal,  a  considerable 
number  of  investors  lose  their  money,  while  the 
really  successful  ones  gain  an  amount  in  excess  of 
the  ordinary  rates  of  profit.  These  characteristics 
appear  in  any  country  where  rapid  development  of 
wealth  is  the  rule,  and  make  the  problem  of  regu- 
lation more  difficult  than  in  countries  where  busi- 
ness conditions  are  more  settled. 

A  revision  of  our  patent  laws  is  another  remedy 
that  has  been  suggested.  As  is  well  known,  some 
corporations  have  been  able  to  control  the  field 
against  all  competitors,  largely  because  of  the 
monopoly  of  certain  devices  or  processes  protected 
by  patents.  The  Bell  Telephone  Company  is  a  good 
illustration.  Our  laws  provide  that  the  term  of  a 
patent  shall  extend  for  seventeen  years,  unless  pre- 
viously granted  by  some  other  country,  in  which 
case  it  shall  expire  with  that  grant.  With  this  pro- 
tection, a  corporation  can  become  so  firmly  en- 
trenched, that  competitors  can  make  little  headway 
against  it  even  after  the  patents  have  expired;  and 
during  the  life  of  fundamental  patents,  related  in- 
ventions are  frequently  acquired  which  can  only  be 
utilized  by  those  possessing  the  original  invention, 
and  thus  the  continuance  of  the  monopoly  is  almost 
without  limit.  It  also  appears  that  this  privilege 
has  sometimes  been  abused.  Corporations  have 
been  known  to  buy  up  patents  with  the  express  in- 
tention of  suppressing  them,  thus  delaying  techni- 

147 


CORPORATIONS  AND   THE   STATE 

cal  progress  and  depriving  the  public  of  useful  im- 
provements. Various  changes  have  been  suggested 
in  our  patent  laws,  to  remove  the  evils  mentioned, 
the  simplest  one  being  to  shorten  the  term  of  the 
patent  from  seventeen  to  ten  years,  with  the  privi- 
lege of  renewal  for  another  five  years  if  consistent 
with  public  policy.  This  plan,  it  is  believed,  would 
not  discourage  inventive  effort  or  the  investment 
of  capital  in  the  development  of  new  inventions. 

Opposition  to  the  enactment  of  more  adequate 
laws  for  the  regulation  of  corporations  is  inspired 
by  a  variety  of  causes,  such  as  the  spirit  of  inertia, 
the  dislike  of  interference  by  public  officials  and  an 
honest  doubt  of  the  utility  and  practicability  of 
public  control  over  business  enterprises.  The  so- 
called  doctrine  of  laissez-faire  still  retains  a  strong 
hold  upon  the  American  people.  There  can,  how- 
ever, be  no  doubt  but  that  more  perfect  regulations 
would  lead  to  better  conditions,  both  for  the  cor- 
poration and  the  public.  There  would  be  fewer 
corporations  to  fail,  and  at  the  same  time  the  un- 
reasonable profits  which  are  realized  by  various 
companies  would  be  diminished.  Indeed,  it  is  to 
be  hoped  that  the  time  may  come  when  the  citizen 
who  can  give  little  attention  to  the  study  of  the 
market  or  of  prospectuses  will  feel  that  when  sub- 
scriptions for  stock  are  invited  he  can  invest  his 
money  with  confidence.  These  all-important  prob- 
lems should  be  worked  out  gradually  by  an  intelli- 
gent public  sentiment,  with  a  spirit  of  fairness  on 
148 


ADVISABLE   REGULATIONS 

the  part  of  the  public  toward  the  corporation,  as 
well  as  with  the  most  scrupulous  honesty  on  the 
part  of  the  managers  in  dealing  with  the  public. 
All  must  be  impressed  with  a  thorough  realization 
of  what  social  classes  owe  to  each  other. 

At  a  conference  of  governors  held  in  1910,  a  sug- 
gestion was  made  that  the  states  should  have  their 
own  local  coloring,  but  that  uniform  statutes  should 
be  passed  so  that  each  might  retain  its  separate 
regulation  of  corporations.  That  was  not  a  new 
proposition.  Although  in  conference  the  governors 
were  agreed  upon  the  advisability  of  enacting  uni- 
form state  laws,  yet  no  substantial  progress  has 
been  made.  State  laws  are  still  widely  at  vari- 
ance, and  the  regulations  now  imposed  upon  corpor- 
ations show  a  glaring  lack  of  uniformity.  There 
are  serious  obstacles  to  uniformity.  First,  what 
state  shall  determine  the  type  of  the  new  laws — 
New  Jersey  or  Oklahoma?  What  body  of  men  is 
wise  enough  to  fix  a  uniform  system  of  regulation 
for  all  corporations  of  the  respective  states  and  re- 
tain the  local  coloring  of  each?  The  fault  of  the 
present  situation  lies  not  merely  in  the  conflicting 
laws  of  the  different  states,  but  as  well  in  the  vary- 
ing degrees  of  strictness  in  their  administration. 
A  measure  of  uniformity,  also  local  independence 
and  local  coloring,  as  it  is  called,  may  very  well 
apply  to  corporations  of  local  scope,  or  of  minor 
importance.  But  the  greater  enterprises  are  be- 
coming more  and  more  of  national  importance. 

149 


CORPORATIONS   AND  THE   STATE 

Does  the  corporation  which  makes  adulterated  food 
have  the  right  to  sell  that  article  in  a  state  which 
forbids  its  manufacture  and  sale?  Must  the  pro- 
tecting power  of  one  state,  under  the  guise  of 
maintaining  its  prerogatives,  be  used  to  shield  its 
corporations  doing  business  in  other  states  when 
both  the  form  of  corporate  organization  and  the 
methods  employed  are  repugnant  to  their  laws? 

There  are  corporations  in  this  country,  95  per 
cent,  of  whose  products  go  beyond  the  borders  of 
the  states  which  chartered  them.  Such  a  corpo- 
ration cannot  be  considered  as  an  institution  of 
one  state,  nor  should  all  its  transactions  be  under 
the  exclusive  control  of  one  state.  There  are  rail- 
ways which  extend  through  eight  or  ten  states, 
and  by  their  branches  embrace  even  a  much  larger 
area.  Is  it  possible  that  the  one  in  which  the  rail- 
way is  incorporated  can  pass  laws  for  a  just  and 
ready  determination  of  all  the  questions  that  may 
at  different  times  arise  in  the  various  jurisdictions 
in  which  it  does  business? 

The  state  must,  of  course,  retain  the  right  to  tax 
the  tangible  property  of  an  interstate  railway  with- 
in its  borders,  including  real  estate  and  its  propor- 
tionate share  of  the  rolling  stock ;  also  it  must  re- 
tain such  police  powers  and  in  fact  such  control 
over  local  rates  and  charges  as  is  consistent  with 
enforcing  its  operation  in  a  manner  equitable  and 
helpful  to  all  the  states  served  by  it.  But  it  is  not 
just  that  a  state  should  require  the  carriage  of  a 

150 


ADVISABLE   REGULATIONS 

ton  of  freight  for  a  specific  haul  for  twenty-five 
cents  when  the  average  cost  for  the  same  haul  over 
the  whole  system  is  fifty  cents.  Uniform  regula- 
tions for  safety  should  be  adopted  and,  so  far  as 
possible,  there  should  be  equality  in  the  service  ren- 
dered. Inasmuch  as  the  nation  has  full  authority 
over  interstate  commerce,  and  the  exercise  of  that 
authority  is  becoming  more  important  each  year,  it 
should  have  the  right  to  control  and  regulate  the 
corporate  activities  which  are  granted  under  that 
power. 

The  only  conclusion  to  be  derived  from  these 
facts  is  that  the  plan  of  federal  incorporation 
affords  the  best  solution  for  the  control  of  railways 
and  other  corporations  doing  an  interstate  busi- 
ness. Such  corporations  should  receive  charters 
from  the  Federal  Government,  and  these  charters 
should  contain  the  regulations  suggested  regard- 
ing organization,  capitalization,  and  management. 
Such  a  plan  will  attack  the  evils  at  their  source  and 
prove  far  more  effective  than  the  attempt  to  regu- 
late corporations,  by  enacting  laws  against  mo- 
nopoly and  restraint  of  trade  after  they  have  grown 
to  enormous  size,  as  a  result  of  a  free  hand  in  the 
beginning. 

The  optional  plan  of  federal  incorporation  is  pref- 
erable to  the  compulsory,  because  it  brings  about 
the  desired  reform  gradually,  and  causes  less  dis- 
turbance to  business.  The  upheaval  caused  by  the 
compulsory  plan  might  assume  such  proportions  as 

151 


CORPORATIONS   AND   THE   STATE 

to  nullify  its  good  effects  for  a  long  time.  It  is 
said  that  if  you  have  an  optional  plan  of  federal 
incorporation,  companies  which  thrive  by  viola- 
tions of  the  law  would  prefer  to  retain  their  state 
charters,  and  only  the  so-called  good  trusts  could 
be  induced  to  incorporate  under  the  Federal  Gov- 
ernment. President  Taft,  in  a  special  message  to 
Congress,  takes  just  the  opposite  view.1  He  thinks 
that  the  worst  offenders  would  be  forced  to  reor- 
ganize with  federal  charters  in  order  to  avoid  pros- 
ecutions under  the  antitrust  law.  It  is  evident 
that  if  only  the  more  law-abiding  companies  did 
incorporate  at  first,  such  manifest  advantages 
would  accrue  to  them  as  to  almost  compel  others  to 


1  "The  third  objection,  that  the  worst  offenders  will  not 
accept  federal  incorporation,  is  easily  answered.  The  de- 
crees of  injunction  recently  adopted  in  prosecutions  under 
the  antitrust  law  are  so  thorough  and  sweeping  that  the  cor- 
porations affected  by  them  have  but  three  courses  before 
them: 

"First,  they  must  resolve  themselves  into  their  compo- 
nent parts  in  the  different  states,  with  a  consequent  loss  to 
themselves  of  capital  and  effective  organization  and  to  the 
country  of  concentrated  energy  and  enterprise  ;  or 

"Second,  in  defiance  of  law  and  under  some  secret  trust 
they  must  attempt  to  continue  their  business  in  violation  of 
the  federal  statute,  and  thus  incur  the  penalties  of  con- 
tempt and  bring  on  an  inevitable  criminal  prosecution  of  the 
individuals  named  in  the  decree  and  their  associates ;  or, 

"Third,  they  must  reorganize  and  accept  in  good  faith  the 
federal  charter  I  suggest." — Special  Message  of  the  Presi- 
dent of  the  United  States  on  Interstate  Commerce  and  Anti- 
trust Laws  and  Federal  Incorporation,  January  1,  1910. 

152 


ADVISABLE   REGULATIONS 

follow  their  example.  Furthermore,  after  a  period 
of  trial,  the  voluntary  plan  could  easily  be  changed 
to  a  compulsory  one,  if  necessity  demanded. 

An  argument  sometimes  urged  against  the  plan 
of  federal  incorporation  is  that  it  would  drive  all 
state  corporations  under  national  control.  This 
same  argument  was  strongly  urged  against  the 
adoption  of  the  national  banking  system  nearly  fifty 
years  ago.  But  no  such  direful  result  has  been 
witnessed.  National  and  state  banks,  and  trust 
companies,  are  doing  business  on  the  same  street, 
and  during  the  last  ten  years  the  deposits  of  state 
banks  and  trust  companies  have  increased  more 
rapidly  than  those  of  the  national  banks.  There  is 
no  friction  between  them,  but  rather  a  wholesome 
competition.  It  is  very  probable  that  under  the 
plan  of  federal  incorporation  a  large  number  of 
companies  would  still  retain  their  state  charters 
although  doing  some  interstate  business,  while  all 
those  corporations  whose  activities  are  confined  to 
a  single  state  would  not  be  included  within  the 
scope  of  the  act.  And  so,  while  the  opposition  to 
national  incorporation  is  likely  to  prevent  the  adop- 
tion of  this  plan  for  some  years  to  come,  yet  such 
a  solution  of  our  most  serious  corporate  problems 
seem  inevitable. 

In  conclusion  it  is  hoped  that  the  suggestions 
contained  in  these  chapters  may  awaken  some  in- 
terest in  the  relation  of  the  corporation  to  the  state, 
for  this  subject  not  merely  concerns  the  making  of 

153 


CORPORATIONS  AND   THE   STATE 

cloth,  or  of  iron,  or  the  operation  of  railways,  but 
the  whole  future  of  this  country.  It  has  a  most 
important  bearing  upon  our  industrial  and  com- 
mercial interests,  and  an  even  wider  scope  in  its 
effects  upon  the  whole  range  of  social  and  political 
conditions. 

It  is  meet  that  we,  who  boast  that  we  have 
framed  and  now  possess  the  latest  and  best  experi- 
ment in  government,  should  also  prove  that  the  cor- 
porations can  be  so  managed  as  not  merely  to  sub- 
serve the  growth  of  this  magnificent  industrial 
country,  but  in  such  a  way  as  shall  be  best  for  the 
common  weal,  and  shall  best  promote  that  equality 
of  opportunity  which  is  our  birthright. 


CHAPTER  VII 

THE  DECISIONS  OF  THE  SUPREME  COURT  IN  THE 

STANDARD   OIL    AND  AMERICAN   TOBACCO 

TRUST   CASES1 

THE  decisions  rendered  by  the  Supreme  Court  of 
the  United  States  in  the  Standard  Oil  and  Tobacco 
Trust  cases  have  attracted  wide  attention  and 
aroused  much  comment,  favorable  and  unfavorable. 
The  case  against  the  Standard  Oil  Company  was 
begun  in  the  Circuit  Court  for  the  Eastern  District 
of  Missouri  in  November,  1906,  and  that  against  the 
American  Tobacco  Company  in  the  Circuit  Court 
for  the  Southern  District  of  New  York,  July,  1907. 
Both  cases  reached  the  Supreme  Court  during  the 
year  1909,  but  owing  to  the  unfortunate  death  or  ill- 
ness of  some  of  the  Justices,  and  the  subsequent  re- 
hearing, they  were  under  consideration  fora  period 
of  nearly  two  years.  The  Supreme  Court  declares 
both  companies  illegal,  and  orders  their  dissolution. 
The  Standard  Oil  Company  is  given  a  period  of  six 
months  in  which  to  reorganize  in  conformity  with 
the  Sherman  Law,  while  the  Tobacco  Company, 

1  This  chapter  does  not  constitute  a  part  of  the  lectures  de- 
livered at  the  University  of  Pennsylvania  in  1910,  but  has 
been  added  since  the  Supreme  Court  decisions  were  rendered. 

155 


CORPORATIONS  AND   THE  STATE 

owing  to  the  complexity  of  its  corporate  structure, 
is  placed  under  the  control  of  the  Circuit  Court, 
which  is  directed  to  devise  some  form  of  reorgani- 
zation not  repugnant  to  the  law.  If  at  the  end  of 
eight  months  the  Court  has  not  worked  out  such  a 
plan  of  reorganization,  or  accepted  one  proposed  to 
it  by  those  concerned,  it  is  directed  to  prohibit  the 
Tobacco  Company  from  further  participation  in  in- 
terstate commerce,  or  to  place  the  company  in  the 
hands  of  a  receiver,  who  shall  give  effect  to  the  re- 
quirements of  the  statute.  This,  in  some  respects, 
is  a  novel  proceeding  in  our  judicial  development, 
and  is  being  watched  with  a  great  deal  of  interest, 
especially  by  those  corporations  the  legality  of 
whose  organization  is  still  in  doubt.  In  all  proba- 
bility a  number  of  trusts  will  voluntarily  adopt  the 
plan  of  organization  finally  approved  by  the  Circuit 
Court. 

The  basis  of  the  adverse  decision  of  the  Supreme 
Court  in  the  Standard  Oil  case,  is  the  wrongful  in- 
tent manifest  by  those  in  control  from  about  the 
year  1870.  The  form  of  corporation  adopted  later, 
that  of  a  holding  company  with  a  New  Jersey  char- 
ter, is  not  directly  attacked,  although  the  fact  that 
by  this  means  its  organizers  were  able  to  secure 
and  maintain  such  complete  dominion  over  the  oil 
business  is  considered  by  the  Supreme  Court  as 
prima  facie  evidence  of  the  wrongful  intent  to  re- 
strain trade.  The  purpose  of  the  organizers  of  this 
corporation  to  monopolize  the  oil  business  is  shown 

156 


DECISIONS   OF  THE   SUPREME   COURT 

by  the  various  methods  employed  in  driving  out 
competitors.  The  Court  mentions  especially  the 
use  of  railway  rebates,  the  control  of  pipe  lines  and 
various  other  acts  intended  to  exclude  others  from 
their  right  to  engage  in  the  same  business.  The 
wrongful  intent  is  especially  shown  by  the  expan- 
sion of  the  New  Jersey  corporation,  concerning 
which  the  court  makes  the  following  statement: 

The  exercise  of  the  power  which  resulted  from  that 
organization  fortifies  the  foregoing  conclusions,  since 
the  development  which  came,  the  acquisition  here  and 
there  wjiich  ensued  of  every  efficient  means  by  which 
competition  could  have  been  asserted,  the  slow  but 
resistless  methods  which  followed,  by  which  means  of 
transportation  were  absorbed  and  brought  under  con- 
trol, the  system  of  marketing  which  was  adopted  by 
which  the  country  was  divided  into  districts  and  the 
trade  in  each  district  in  oil  was  turned  over  to  a 
designated  corporation  within  the  combination  and  all 
others  were  excluded,  all  lead  the  mind  up  to  a  convic- 
tion of  a  purpose  and  intent  which  we  think  is  so  cer- 
tain as  practically  to  cause  the  subject  not  to  be  within 
the  domain  of  reasonable  contention. 

The  grounds  on  which  the  Supreme  Court  de- 
clared the  American  Tobacco  Company  an  illegal 
combination,  as  in  the  Standard  Oil  case,  appear  to 
be  not  so  much  its  form  or  size,  as  the  conscious 
intent  on  the  part  of  a  few  persons  to  monopolize 
all  branches  of  the  tobacco  business  by  methods 
manifestly  unfair  and  illegal.  In  some  cases  fierce 

157 


CORPORATIONS  AND   THE   STATE 

trade  wars  were  engaged  in  to  drive  out  competi- 
tors. This  was  especially  true  in  the  Plug  Tobacco 
and  Snuff  wars  which  occurred  in  the  nineties.  In 
other  cases  excessive  amounts  were  paid  to  inde- 
pendent producers,  to  induce  them  to  sell  out  and 
agree  to  keep  out  of  the  tobacco  business  for  a 
considerable  number  of  years.  For  instance,  the 
National  Tobacco  Works,  capitalized  at  $400,000, 
received  $600,000  in  cash  and  $1,200,000  in  stock 
of  the  American  Tobacco  Company.  Many  plants 
thus  acquired  were  soon  dismantled.  Subsidiary 
corporations,  nominally  independent  but  secretly 
controlled  by  this  same  group  of  capitalists,  were 
organized  and  put  into  the  field  to  drive  out  or 
prevent  the  entry  of  competitors.  Such  wrongful 
acts  as  these,  in  the  opinion  of  the  Supreme  Court, 
endanger  individual  liberty  and  are  a  menace  to 
public  welfare.  It  was  just  such  conduct  that  the 
Sherman  law  was  intended  to  prevent. 

In  the  American  Tobacco  case,  the  Supreme 
Court  sums  up  the  charges  against  the  company 
as  follows: 

Indeed,  the  history  of  the  combination  is  so  replete 
with  the  doing  of  acts  which  it  was  the  obvious  pur-- 
pose of  the  statute  to  forbid,  so  demonstrative  of  the 
existence  from  the  beginning  of  a  purpose  to  acquire 
dominion  and  control  of  the  tobacco  trade,  not  by  the 
mere  exertion  of  the  ordinary  right  to  contract  and  to 
trade,  but  by  methods  devised  in  order  to  monopolize 
the  trade  by  driving  competitors  out  of  business,  which 

158 


DECISIONS   OF   THE   SUPREME   COURT 

were  ruthlessly  carried  out  upon  the  assumption  that 
to  work  upon  the  fears  or  play  upon  the  cupidity  of 
competitors  would  make  success  possible.  We  say 
these  conclusions  are  inevitable,  not  because  of  the 
vast  amount  of  property  aggregated  by  the  combina- 
tion, not  because  alone  of  the  many  corporations  which 
the  proof  shows  were  united  by  resort  to  one  device  or 
another.  Again,  not  alone  because  of  the  dominion 
and  control  over  the  tobacco  trade  which  actually 
exists,  but  because  we  think  the  conclusion  of  wrong- 
ful purpose  and  illegal  combination  is  overwhelmingly 
established  by  the  following  considerations,  etc.1 

The  particular  feature  of  these  decisions  to  which 
most  significance  should  be  attached  is  the  inter- 
pretation placed  by  a  majority  of  the  Court  upon 
the  Sherman  Antitrust  Law.  Much  difference  of 
opinion  exists  as  to  the  ultimate  effect  and  scope 
of  this  interpretation.  The  strong  dissenting 
opinion  of  Justice  Harlan,  together  with  the  ab- 
sence of  protest  by  business  interests  of  the  coun- 
try, and  the  sudden  rise  in  the  stock  market  fol- 
lowing the  decision  in  the  Standard  Oil  Case,  might 
lead  to  the  inference  that  the  Sherman  Law  has 
been  seriously  emasculated.  That  this  view  is  also 
shared  by  some  legislators,  is  shown  by  the  fact 
that  a  number  of  amendments,  intended  to  restore 
to  the  Sherman  Law  its  original  meaning,  as  they 
had  interpreted  it,  were  introduced  in  Congress 

1  For  full  text  see  Appendix  A,  p.  201. 
159 


CORPORATIONS   AND   THE   STATE 

immediately  after  the  Standard  Oil  decision  was 
rendered.  On  the  other  hand,  it  is  believed  by 
many,  that  the  law  has  been  made  to  harmonize 
with  existing  conditions,  and  has  been  strength- 
ened and  made  more  effective  as  a  result  of  the 
new  interpretation. 

Chief  Justice  White,  who  rendered  the  majority 
opinion  in  both  cases,  holds  that  the  words  "re- 
straint of  trade"  and  "monopolize"  should  have 
the  meaning  which  they  had  at  common  law  when 
the  Antitrust  Act  was  passed,  and  to  this  end  he 
reviews  the  common  law  principle  of  restraint  of 
trade  as  it  was  applied  in  England,  and  as  it  was 
later  adopted  into  the  laws  of  this  country.  In  the 
absence  of  any  exact  definition  of  these  terms,  he 
holds  that  they  should  be  interpreted  in  the  light 
of  reason,  as  they  were  at  common  law.  Applying 
this  standard,  he  holds  that  not  all  contracts  in  re- 
straint of  trade  are  illegal,  but  only  those  contracts 
which  necessarily  tend  to  develop  monopoly,  con- 
trol prices,  and  limit  output.  The  clearest  and 
most  concise  statement  of  the  Court's  position  is 
found  in  the  decision  rendered  in  the  Tobacco  Trust 
case,  as  follows: 

Applying  the  rule  of  reason  to  the  construction  of 
the  statute,  it  was  held,  in  the  Standard  Oil  case,  that 
as  the  words  "restraint  of  trade"  at  common  law  and 
in  the  law  of  this  country  at  the  time  of  the  adoption 
of  the  Antitrust  Acts  only  embraced  acts,  or  con- 
tracts, or  agreements  or  combinations  which  operated 

160 


DECISIONS   OF  THE  SUPREME  COURT 

to  the  prejudice  of  the  public  interests  by  unduly  re- 
stricting competition  or  unduly  obstructing  the  due 
course  of  trade,  or  which,  either  because  of  their 
inherent  nature,  or  effect,  or  because  of  the  evident 
purpose  of  the  acts,  etc. ,  injuriously  restrained  trade, 
that  the  words,  as  used  in  the  statute,  were  designed  to 
have,  and  did  have,  a  like  significance.  It  was  there- 
fore pointed  out  that  the  statute  did  not  forbid  or 
restrain  power  to  make  normal  and  usual  contracts  to 
further  trade  by  resorting  to  all  normal  methods, 
whether  by  agreement  or  otherwise,  to  accomplish  such 
purpose.1 

The  whole  controversy  over  this  opinion  of  the 
Supreme  Court  turns  around  the  question  whether 
it  has  read  into  the  Sherman  Law  the  words  "un- 
reasonable" or  "undue"  before  the  words  "re- 
straint of  trade,"  and  "monopolize."  This  is  the 
premise  on  which  the  dissenting  opinion  of  Justice 
Harlan  is  based,  and  if  it  is  true  then  there  is  no 
escape  from  the  conclusion  that  the  commonly  ac- 
cepted interpretation  of  its  meaning  has  been 
erroneous.  The  question  of  amending  the  law  by 
introducing  the  element  of  reasonableness  or  un- 
reasonableness has  been  frequently  discussed,  and 
the  conclusion  has  been  almost  unanimous  that 
it  could  not  safely  be  done.  The  Judiciary  Com- 
mittee of  the  Senate  in  1909,  in  a  report  upon  a  bill 
to  modify  the  Sherman  Law,  made  the  following 
statement: 

1  For  full  text  see  Appendix  A,  p.  198. 
13  161 


CORPORATIONS  AND   THE   STATE 

To  inject  into  the  act  the  question  of  whether  an 
agreement  or  combination  is  reasonable  or  unreasona- 
ble, would  render  the  act  as  a  criminal  or  penal  statute 
indefinite  and  uncertain,  and  hence,  to  that  extent, 
utterly  nugatory  and  void,  and  would  practically 
amount  to  a  repeal  of  that  part  of  the  act. 

and  further  on  the  committee  say : 

And  while  the  same  technical  objection  does  not 
apply  to  civil  prosecutions,  the  injection  of  the  rule  of 
reasonableness  or  unreasonableness  would  lead  to  the 
greatest  variableness  and  uncertainty  in  the  enforce- 
ment of  the  law.  The  defence  of  reasonable  restraint 
would  be  made  in  every  case  and  there  would  be  as 
many  different  rules  of  reasonableness  as  cases,  courts, 
and  juries.  What  one  court  or  jury  might  deem 
unreasonable  another  court  or  jury  might  deem  reason- 
able. 

President  Taft  in  his  message  to  Congress  in 
January,  1910,  also  opposed  the  proposition  to  in- 
sert these  words  into  the  language  of  the  Sherman 
Law,  and  stated  his  objection  as  follows: 

I  venture  to  think  that  this  is  to  put  into  the  hands 
of  the  Court  a  power,  impossible  to  exercise  on  any 
consistent  principle  which  will  insure  the  uniformity 
of  decision  essential  to  just  judgment.  It  is  to  thrust 
upon  the  courts  a  burden  that  they  have  no  precedents 
to  enable  them  to  carry,  and  to  give  them  a  power 
approaching  the  arbitrary,  the  abuse  of  which  might 
involve  our  whole  judicial  system  in  disaster. 

162 


DECISIONS   OF  THE  SUPREME   COURT 

The  Supreme  Court  in  both  decisions  several 
times  uses  the  words  "undue"  or  "unduly"  in  con- 
nection with  the  term  "restraint  of  trade."  Jus- 
tice Harlan  calls  attention  to  the  fact  that  in  the 
Standard  Oil  case  the  court  practically  informs  the 
subsidiary  companies  that  they  may  join  in  an 
agreement  to  restrain  commerce  among  the  states, 
provided  such  restraint  be  not  "undue."  On  the 
other  hand,  viewing  both  decisions  in  their  entirety, 
we  may  interpret  them  as  showing  that  the  inten- 
tion of  the  court  was  simply  to  remove  from  the 
scope  of  the  law  only  such  contracts  or  agreements 
as  are  necessary,  normal,  and  helpful  to  promote 
legitimate  business. 

Since  the  decisions  of  the  Supreme  Court  in  the 
Trans-Missouri  Freight,  and  the  Joint  Traffic  Asso- 
ciation cases,  the  predominant  opinion  has  been 
that  every  contract  or  agreement  in  any  way  re- 
straining interstate  trade  was  illegal.  Justice 
Peckham,  who  rendered  the  opinion  in  both  these 
cases,  said  in  the  former: 

The  language  of  the  act  includes  every  contract, 
combination  in  the  form  of  trust  or  otherwise,  or  con- 
spiracy in  restraint  of  trade  or  commerce  among  the 
several  states  or  with  foreign  nations.  So  far  as  the 
very  terms  of  the  statute  go,  they  apply  to  any  con- 
tract of  the  nature  described. 

In  another  place  Justice  Peckham  more  specifically 
says: 

163 


CORPORATIONS  AND   THE   STATE 

By  the  simple  use  of  the  term  "contract  in  restraint 
of  trade,"  all  contracts  of  that  nature,  whether  valid 
or  otherwise,  would  be  included,  and  not  alone  that 
kind  of  contract  which  was  invalid  and  unenforceable 
as  being  in  unreasonable  restraint  of  trade.  .  .  .  The 
plain  and  ordinary  meaning  of  such  language  is  not 
limited  to  that  kind  of  contract  alone  which  is  an  un- 
reasonable restraint  of  trade,  but  all  contracts  are  in- 
cluded in  such  language,  and  no  exception  or  limita- 
tion can  be  added  without  placing  in  the  act  that  which 
has  been  omitted  by  Congress. 

The  lower  courts  have  generally  accepted  this 
view  of  the  law.  Judge  Lacombe  in  the  case  of 
the  Tobacco  Company  in  the  Circuit  Court  for  the 
Southern  District  of  New  York  (164  Federal  Re- 
porter, 702)  said: 

But  every  aggregation  of  individuals  or  corporations, 
formerly  independent,  immediately  upon  its  formation 
terminates  an  existing  competition,  whether  or  not 
some  other  competition  may  arise.  The  act  as  above 
construed  prohibits  every  contract  or  combination  in 
restraint  of  competition.  Size  is  not  made  a  test: 
Two  individuals  who  have  been  driving  rival  express 
wagons  between  villages  in  two  contiguous  states,  who 
enter  into  a  combination  to  join  forces  and  operate  a 
single  line  restrain  an  existing  competition;  and  it 
would  seem  to  make  little  difference  whether  they 
make  such  combination  more  effective  by  forming  a 
partnership  or  not. 

An  especially  clear  statement  of  the  view  of 
164 


DECISIONS  OF  THE  SUPREME  COURT 

the  Sherman  Law  formerly  prevailing  is  found  in 
an  opinion  rendered  by  Justice  Day  in  the  case  of 
the  United  States  vs.  Chesapeake  &  Ohio  Fuel  Co., 
while  he  was  one  of  the  judges  of  the  Circuit 
Court  of  Appeals  for  the  Sixth  District.  In  this 
case  he  said: 

Congress  has  seen  fit  to  prohibit  all  contracts  in 
restraint  of  trade.  It  has  not  left  to  the  courts  the 
consideration  of  the  question  whether  such  restraint  is 
reasonable  or  unreasonable,  or  whether  the  contract 
would  have  been  illegal  at  the  common  law  or  not. 
The  act  leaves  for  consideration  by  judicial  authority, 
no  question  of  this  character,  but  all  contracts  and 
combinations  are  declared  illegal,  if  in  restraint  of 
trade  or  commerce  among  the  states. 

It  was  evidently  the  intention  of  the  Supreme 
Court  in  the  two  decisions  under  discussion  to 
modify  this  view  of  the  law,  for  it  says  in  the 
Standard  Oil  case,  that  to  follow  this  narrow  inter- 
pretation would  be  to  destroy  "all  right  to  contract 
or  agree  or  combine  in  any  respect  whatever,  as  to 
the  subjects  embraced  in  interstate  trade  or  com- 
merce." 

As  already  stated,  Justice  Harlan  in  his  dissent- 
ing opinion  in  the  Standard  Oil  case  maintains  that 
the  court  has  injected  the  word  "unreasonable"  in- 
to the  Sherman  Law,  and  in  so  doing  has  not  only 
reversed  the  decision  of  the  court  in  preceding 
cases,  but  has  indulged  in  judicial  legislation.  He 

165 


CORPORATIONS  AND  THE   STATE 

asserts  that  the  Court  has  in  effect  amended  the 
Sherman  Law,  which  right  belongs  to  Congress 
alone,  and  not  to  the  courts.  In  the  Tobacco  case 
he  also  states  that  this  opinion  of  the  court  is  obiter 
dicta.  On  this  point  he  says: 

Let  me  say,  also,  that  as  we  all  agree  that  the  com- 
bination in  question  was  illegal  under  any  construction 
of  the  Antitrust  Act,  there  was  not  the  slightest  neces- 
sity to  enter  upon  an  extended  argument  to  show  that 
the  Act  of  Congress  was  to  be  read  as  if  it  contained 
the  word  "unreasonable"  or  "undue."  All  that  is 
said  in  the  Court's  opinion  in  support  of  that  view,  is, 
I  say  with  respect,  obiter  dicta. 

If  Justice  Harlan  is  correct  in  this  contention, 
the  opinion  of  Chief  Justice  White  would  not  be 
binding  upon  the  lower  courts  or  upon  the  future 
decisions  of  the  Supreme  Court. 

But  this  opinion  cannot  be  regarded  as  obiter 
dicta,  as  those  words  are  commonly  understood. 
It  was  the  very  evident  intention  of  the  Court  to 
enunciate  rules  which  should  settle  perplexing 
questions  relating  to  the  scope  of  the  Sherman 
Antitrust  Law,  and  manifestly  the  opinion  ren- 
dered by  the  majority  received  as  mature  consid- 
eration as  the  judgment  of  the  Court  itself. 

In  reading  the  conflicting  opinions  in  the  two 
cases  it  appears  that  the  difference  between  the 
learned  judges  is  largely  one  of  phraseology.  Jus- 
tice Harlan  avers  that  in  defining  what  is  prohibited 

166 


DECISIONS   OF  THE   SUPREME   COURT 

by  the  Sherman  law  the  Court,  in  the  most  unequiv- 
ocal terms,  has  repeatedly  held  that  combinations 
or  acts  in  restraint  of  trade  were  alike  violative 
of  the  statute  whether  such  acts  were  considered 
unreasonable,  or  reasonable  and  productive  of  salu- 
tary results  in  the  transaction  of  business.  On  the 
other  hand,  Chief  Justice  White,  in  both  decisions 
maintains  that  the  interpretation  of  the  Sherman 
Law  adopted  by  the  Court  is  in  line  with,  and  not  a 
reversal  of,  the  earlier  position  of  the  Court,  and 
bases  his  contention  upon  the  definition  of  the  term 
"restraint  of  trade. "  It  is  maintained  by  him  that 
it  is  of  fundamental  importance  to  define  at  the  very 
outset,  what  is  restraint  of  trade,  and  that  this 
question  must  be  determined  in  accordance  with  the 
rule  of  reason.  In  applying  the  rule  of  reason,  re- 
sort may  be  had  to  the  decisions  of  the  common  law. 
It  thus  appears  that  in  the  assertion  of  this  distinc- 
tion, namely,  that  it  should  be  first  determined  what 
is  restraint  of  trade,  a  conclusion  may  be  reached 
by  the  courts  that  acts  which  have  been  commonly 
regarded  as  contrary  to  the  Antitrust  Law,  because 
they  involve  the  elimination  of  competition,  are 
nevertheless  not  in  restraint  of  trade.  The  Chief 
Justice  also  lays  stress  upon  the  different  concep- 
tions of  economic  conditions  accepted  from  time  to 
time,  and  refers  to  the  fact  that  acts  which  were 
at  one  time  deemed  to  be  of  such  a  character  as  to 
justify  the  inference  of  wrongful  intent,  were  at 
another  period  thought  not  to  be  of  that  character. 

167 


CORPORATIONS   AND   THE  STATE 

In  support  of  his  contention  that  the  Court  has 
not  reversed  itself,  the  Chief  Justice  in  the  Tobacco 
cases  says: 

In  that  (the  Standard  Oil)  case  it  was  held,  without 
departing  from  any  previous  decision  of  the  Court, 
that  as  the  statute  had  not  defined  the  words  restraint 
of  trade,  it  became  necessary  to  construe  those  words, 
a  duty  which  could  only  be  discharged  by  a  resort  to 
reason.  We  say  the  doctrine  thus  stated  was  in  accord 
with  all  the  previous  decisions  of  this  Court,  despite 
the  fact  that  the  contrary  view  was  sometimes  errone- 
ously attributed  to  some  of  the  expressions  used  in  two 
prior  decisions  (the  Trans-Missouri  Freight  Association 
and  Joint  Traffic  cases,  166  U.  S.,  290,  and  171  U.  S., 
505). 

In  his  dissenting  opinion  in  the  Standard  Oil 
case,  Justice  Harlan  quotes  extensively  from  both 
the  two  railroad  cases  just  mentioned  in  support  of 
his  contention  that  the  Court  by  inserting  the  word 
"unreasonable"  has  completely  overruled  its  posi- 
tion in  the  earlier  cases,1  and  the  two  extracts  from 
these  decisions  cited  above,  as  well  as  the  history 
of  these  cases,  seem  to  bear  out  his  contention. 

At  the  time  the  Trans-Missouri  Freight  Asso- 
ciation case  was  before  the  lower  court  in  1892, 
Judge  Riner  took  the  ground  that  the  Sherman  law 
did  not  apply  to  any  reasonable  regulation  of  freight 
fates  between  competing  common  carriers.  This 

1  See  Appendix  B,  p.  208. 
168 


DECISIONS   OF  THE   SUPREME  COURT 

view  was  affirmed  by  Judge  Sanborn  of  the  Circuit 
Court  of  Appeals  in  1893.  But  as  already  stated, 
the  Supreme  Court  of  the  United  States  overruled 
the  judgment  of  the  lower  courts  on  the  ground 
that  the  law  without  any  limitation  applied  to  all 
contracts  in  restraint  of  trade,  whether  reasonable 
or  not.  Justice  White,  now  Chief  Justice,  wrote 
a  strong  dissenting  opinion  in  this  case  which  in 
the  main  followed  the  reasoning  of  the  lower  courts. 
The  views  presented  at  that  time  by  him  resemble 
the  opinions  rendered  by  him  in  the  two  recent 
trust  cases.  When  the  Joint  Traffic  Association 
case  came  before  the  Supreme  Court  in  1896,  the 
arguments  of  Justice  White  in  his  minority  opinion 
in  the  previous  case  were  again  urged  upon  the 
Court,  but  it  emphatically  overruled  them  in  the 
following  words : 

It  is  not  now  alleged  that  the  Court  on  the  former 
occasion  overlooked  any  argument  for  the  respondents 
or  misapplied  any  controlling  authority.  It  is  simply 
insisted  that  the  Court,  notwithstanding  the  arguments 
for  an  opposite  view,  arrived  at  an  erroneous  result 
which,  for  reasons  already  stated,  ought  to  be  recon- 
sidered and  reversed.  As  we  have  twice  already  de- 
liberately and  earnestly  considered  the  same  arguments 
which  are  now  for  a  third  time  pressed  upon  our  atten- 
tion, it  could  hardly  be  expected  that  our  opinion 
should  now  change  from  that  already  expressed. 

The  Court  in  these  recent  trust  cases  was  con- 
169 


CORPORATIONS   AND   THE  STATE 

fronted  with  the  difficult  problem  of  giving  a  more 
liberal  definition  of  the  term  "restraint  of  trade" 
and  yet  maintaining  substantial  consistency  with 
its  former  decisions.  On  the  one  hand,  it  must 
interpret  the  law  in  such  a  way  that  the  word 
unreasonable  should  not  be  understood  to  have 
been  inserted  before  the  words ' '  restraint  of  trade" 
and  "monopolize."  On  the  other  hand  it  must  re- 
frain from  giving  such  a  narrow  interpretation  as 
would  make  the  law  destructive  of  all  normal  busi- 
ness methods.  Careful  consideration  of  the  two 
opinions  rendered  by  the  Court  would  seem  to  war- 
rant the  belief  that  it  has  successfully  avoided  these 
two  pitfalls,  and  has  simply  asserted  that  in  de- 
ciding upon  such  cases,  it  is  permitted  under  the 
law  to  use  its  judgment  as  to  whether  the  acts  or 
transactions  of  any  defendant  are  such  as  would  re- 
strict competition  to  an  extent  detrimental  to  pub- 
lic welfare.  If  this  has  been  accomplished  by  the 
Court,  then  undoubtedly  the  Sherman  law  has  been 
greatly  strengthened  instead  of  emasculated  as  a 
result  of  this  interpretation.  The  narrower  view 
of  the  law  is  so  drastic  as  to  prohibit,  if  applied, 
those  business  methods  which  tend  to  promote 
rather  than  to  restrain  interstate  trade  and  com- 
merce. Under  such  an  interpretation,  legitimate 
business  might  be  declared  illegal  if  brought  into 
court,  and  guilty  parties  to  an  illegal  combination 
might  on  technicalities  escape  prosecution.  The 
lower  court  in  taking  the  narrower  view  of  the 

170 


DECISIONS   OF  THE   SUPREME   COURT 

law  in  the  Tobacco  case  attacked  the  form  of  com- 
bination rather  than  its  intent  and  effect,  and 
accordingly  was  forced  to  release  three  subsidiary 
corporations  and  a  number  of  persons  which  the 
Supreme  Court  under  a  stricter  interpretation 
brought  within  the  meaning  of  the  law. 

The  Sherman  Law  has  also  been  materially 
strengthened  by  the  fact  that  in  these  two  cases  the 
Supreme  Court  has  finally  and  conclusively  over- 
ruled its  position  in  the  Knight  Sugar  Case,  decided 
in  January,  1895.  Owing  to  the  insufficiency  of  the 
allegations  presented  by  the  government's  prose- 
cuting attorneys  in  both  the  lower  and  higher 
courts,  this  case  was  decided  against  the  govern- 
ment. The  American  Sugar  Refining  Company 
was  indicted  for  the  monopolistic  control  of  the 
manufacture  of  refined  sugar,  instead  of  the  com- 
bined business  of  refining  and  selling  sugar 
throughout  the  United  States.  The  Supreme  Court, 
while  not  denying  that  the  trust  was  a  monopoly, 
expressed  the  view  that  monopoly  in  production 
does  not  necessarily  and  directly  restrain  commerce 
among  the  states.  It  held  that  the  Federal  Gov- 
ernment had  no  control  over  the  manufacture  of 
sugar.  This  was  a  matter  subject  only  to  state 
regulations ;  the  authority  of  Congress  was  limited 
to  interstate  and  foreign  commerce.  After  this 
decision  it  was  believed  by  many  for  years  that  the 
Sherman  Law  could  not  be  constitutionally  applied 
to  industrial  combinations.  The  overruling  of  such 

171 


CORPORATIONS   AND   THE   STATE 

a  view  of  the  law  has  greatly  strengthened  the 
hands  of  the  government  in  the  control  of  indus- 
trial corporations  in  the  future. 

An  important  question  connected  with  these  de- 
cisions is  whether  they  have  cleared  the  atmosphere 
so  that  all  organizations  doing  an  interstate  busi- 
ness can  know  whether  they  are  legal  or  illegal. 

It  was  confidently  hoped  that  this  would  be  the 
outcome,  but  the  general  feeling  at  present  is  that 
the  situation  is  still  somewhat  uncertain.  The 
Supreme  Court  has  pointed  out  that  normal  con- 
tracts and  methods,  such  as  .are  necessary  to  con- 
duct legitimate  business,  are  not  illegal  under  the 
law  as  interpreted  in  the  light  of  reason.  It  has 
also  pointed  out  on  the  other  side  that  a  combination 
which  employs  unfair  methods  to  drive  competi- 
tors out  of  business  or  force  them  into  a  combina- 
tion, is  illegal.  One  question  which  the  court 
has  not  settled  conclusively  is  whether  a  combina- 
tion of  competing  concerns  brought  about  not  by 
coercion,  but  by  mutual  consent,  which  does  not 
attempt  to  stifle  the  competition  of  rival  concerns 
is  contrary  to  law.  The  decision  still  leaves  some 
uncertainty  as  to  whether  the  holding  company 
form  of  organization,  in  and  of  itself,  would  be 
considered  illegal,  a  question  which  would  assume 
especial  importance  if  by  this  means  a  given  in- 
dustry were  monopolized.  The  natural  inference 
from  these  cases,  however,  is  that  no  form  of  cor- 
porate organization  is  necessarily  illegal  except 

172 


DECISIONS  OF  THE  SUPREME  COURT 

when  its  practices  are  characterized  by  wrongful 
intent. 

The  conclusion  which  the  public  may  derive  from 
these  decisions,  is  that  a  somewhat  different  rule 
will  be  observed  hereafter  in  relation  to  acts  in  re- 
straint of  trade.  The  question  of  benefit  or  injury 
to  the  public  welfare  in  the  case  of  any  particular 
act  will  presumably  receive  greater  attention  and 
more  will  be  left  to  the  discretion  of  the  courts. 
The  use  of  the  rule  of  reason  will  leave  a  larger 
responsibility  to  the  courts  and  an  added  degree  of 
flexibility  in  the  treatment  of  combinations  engaged 
in  trade  or  commerce,  in  the  application  of  which 
great  regard  will  be  given  to  the  circumstances  of 
each  particular  case.  It  would  be  too  much  to  ex- 
pect that  the  legality  of  every  form  of  organization 
will  be  free  from  doubt,  but  at  least  additional  light 
has  been  thrown  upon  the  subject,  and  a  greater 
degree  of  certainty  has  been  attained. 

The  most  important  question  connected  with 
these  decisions  is  whether  the  Sherman  Law  as 
thus  interpreted  will  prove  adequate  in  the  future 
for  the  regulation  of  large  combinations.  In  this 
connection  it  will  be  recalled  that  the  Standard  Oil 
Company  or  its  predecessor  has  been  engaged  in 
clubbing  its  competitors,  and  in  other  unfair  prac- 
tices since  about  1872.  During  twenty-one  years 
of  this  time,  the  Sherman  Law  has  been  in  force, 
and  yet  only  in  this  year,  1911,  has  this  trust  been 
finally  brought  to  justice. 

173 


CORPORATIONS  AND   THE   STATE 

Between  the  years  1891-1898,  the  original  Ameri- 
can Tobacco  Company  acquired  the  ownership  of 
fifteen  other  concerns,  and  in  the  so-called  plug 
tobacco  war,  lost  millions  in  coercing  competitors. 
It  organized  the  Continental  Tobacco  Company, 
and  together  with  this  new  concern  bought  up  a 
large  number  of  competing  corporations  and  firms, 
many  of  which  were  promptly  abandoned.  All 
this  time  the  Sherman  Law  was  on  the  statute  books, 
and  these  practices  were  just  as  illegal  then  as  now. 
It  is  only  during  the  last  decade  that  any  vigor- 
ous attempt  has  been  made  by  the  government  to 
enforce  the  law  against  industrial  combinations. 
In  the  next  place,  the  law  attacks  combinations 
only  when  they  have  grown  to  full  size  as  the 
result  of  illegal  practices.  Then  when  they  are 
declared  illegal  by  the  court,  all  that  is  neces- 
sary, apparently,  is  for  them  to  devise  some  new 
form  of  combination  which  the  Court  has  not  yet 
passed  upon,  and  proceed  with  the  conduct  of  its 
business  as  before. 

As  stated  in  the  preceding  chapters,  the  only 
rational  way  for  the  government  to  control  corpora- 
tions doing  an  interstate  business  is  to  limit  the 
powers  and  privileges  granted  by  their  charters 
and  to  subject  them  to  adequate  and  uniform  regu- 
lations. This  can  only  be  accomplished  by  adopting 
the  plan  of  federal  incorporation.  At  present  the 
only  control  which  the  government  exercises  over 
corporations  is  by  lawsuit.  It  must  wait  until  some 

174 


DECISIONS   OF   THE   SUPREME   COURT 

offense  is  alleged  against  a  corporation  before 
passing  upon  the  legality  of  its  business  methods. 
These  decisions  have  also  called  attention  to  the 
desirability  of  establishing  a  body  similar  to  the  In- 
terstate Commerce  Commission  which  shall  super- 
vise and  control  the  affairs  of  industrial  corpora- 
tions. The  action  of  the  Supreme  Court  in  imposing 
upon  the  Circuit  Court  the  duty  of  supervising  and 
assisting  the  Tobacco  Trust  to  reorganize  shows 
the  usefulness  of  an  administrative  body  to  perform 
regularly  this  sort  of  work.  It  has  also  been 
suggested  that  the  Bureau  of  Corporations  could 
perform  such  functions  if  granted  the  power  by 
Congress. 

Questions  relating  to  the  definition  of  restraint 
of  trade  and  monopoly  and  the  proper  interpreta- 
tion of  the  Sherman  Law,  important  as  they  are, 
are  nevertheless  overshadowed  by  a  problem  more 
far-reaching,  namely,  the  benefit  or  injury  to  the 
general  welfare  of  great  aggregations  of  capital 
in  industry,  trade,  and  transportation.  Before  any 
judicious  or  adequate  conclusion  can  be  reached, 
the  economic  and  social  effect  of  combinations 
and  large  scale  operations  must  be  determined. 
Plausible  arguments  may  be  alleged  in  favor  of  a 
continuance  of  the  former  order  of  things,  under 
which  business  transactions  were  conducted  by 
individuals  or  smaller  organizations.  It  may  be 
urged  that  social  well-being  is  promoted  when  the 

175 


CORPORATIONS  AND   THE   STATE 

industrial  field  is  occupied  by  lesser  units,  but 
modern  progress  is  making  rapid  strides  in  the 
opposite  direction.  Every  nation  is  engaged  in  a 
rivalry  for  advantages  in  the  world's  trade,  and 
the  massing  of  capital  in  manufacturing  and  com- 
merce seems  to  be  best  adapted  to  secure  effi- 
ciency, though  this  does  not  necessarily  mean  that 
there  is  to  be  no  limit  upon  combination  or  size. 
At  present  the  intelligent  solution  of  the  relation 
of  corporations  to  the  public  is  clouded  by  a  very 
natural  feeling  of  antagonism  toward  them,  en- 
gendered by  the  misconduct  of  many  of  their 
managers. 

In  the  investigation  of  new  phases  of  modern 
industry  and  commerce,  it  is  difficult  to  depart 
from  widely  accepted  views  which  have  been  so 
ably  presented  by  numerous  economists  for  more 
than  a  hundred  years.  They  have  dwelt  upon 
competition  as  the  life  of  trade,  and  the  idea  is  still 
general  that  it  is  essential  to  normal  development. 
In  the  preceding  pages  the  advantages  of  competi- 
tion and  the  obstacles  in  the  way  of  a  new  era  of 
combination  have  been  carefully  set  forth.  The 
people  cannot  readily  reconcile  themselves  to  new 
conditions  and  relations  in  which  great  aggrega- 
tions of  capital  and  the  constantly  increasing  con- 
centration of  industry  are  distinctive  features. 
While  the  ultimate  solution  cannot  be  forecast  with 
accuracy,  every  present  indication  points  to  a  pe- 
riod in  which  combination  will  assume  increas- 

176 


DECISIONS   OF  THE   SUPREME   COURT 

ing  importance  in  all  lines  of  industry  and  trade, 
and  if  such  a  regime  becomes  established  adequate 
regulation  must  accompany  it  as  a  necessary 
sequence. 


13 


APPENDICES 


APPENDIX   A 


EXTRACTS  FROM  THE  OPINIONS  OF  CHIEF- 
JUSTICE  WHITE  IN  THE  STANDARD  OIL 
AND  AMERICAN  TOBACCO  CASES  WITH 
REFERENCE  TO.  THE  CONSTRUCTION  OF 
THE  ANTITRUST  ACT 

From  the  Standard  Oil  Case 

WITHOUT  going  into  detail  and  but  very  briefly  sur- 
veying the  whole  field,  it  may  be,  with  accuracy,  said 
that  the  dread  of  enhancement  of  prices  and  of  other 
wrongs  which  it  was  thought  would  flow  from  the  undue 
limitation  on  competitive  conditions  caused  by  contracts 
or  other  acts  of  individuals  or  corporations,  led,  as  a 
matter  of  public  policy,  to  the  prohibition  or  treating 
as  illegal  all  contracts  or  acts  which  were  unreasonably 
restrictive  of  competitive  conditions,  either  from  the 
nature  or  character  of  the  contract  or  act  or  where  the 
surrounding  circumstances  were  such  as  to  justify  the 
conclusion  that  they  had  not  been  entered  into  or  per- 
formed with  the  legitimate  purpose  of  reasonably  for- 
warding personal  interest  and  developing  trade,  but, 
on  the  contrary,  were  of  such  a  character  as  to  give  rise 
to  the  inference  or  presumption  that  they  had  been 
entered  into  or  done  with  the  intent  to  do  wrong  to  the 
general  public  and  to  limit  the  right  of  individuals, 

181 


APPENDIX  A 

thus  restraining  the  free  flow  of  commerce  and  tending 
to  bring  about  the  evils,  such  as  enhancement  of  prices, 
which  were  considered  to  be  against  public  policy.  It 
is  equally  true  to  say  that  the  survey  of  the  legislation 
in  this  country  on  this  subject  from  the  beginning 
will  show,  depending  as  it  did  upon  the  economic 
conceptions  which  obtained  at  the  time  when  the  legis- 
lation was  adopted  or  judicial  decision  was  rendered, 
that  contracts  or  acts  were  at  one  time  deemed  to  be 
of  such  a  character  as  to  justify  the  inference  of  wrong- 
ful intent  which  were  at  another  period  thought  not  to 
be  of  that  character.  But  this  again,  as  we  have  seen, 
simply  followed  the  line  of  development  of  the  law  of 
England. 

Let  us  consider  the  language  of  the  first  and  second 
sections,  guided  by  the  principle  that  where  words  are 
employed  in  a  statute  which  had  at  the  time  a  well- 
known  meaning  at  common  law  or  in  the  law  of  this 
country  they  are  presumed  to  have  been  used  in  that 
sense  unless  the  context  compels  to  the  contrary.1 

As  to  the  first  section,  the  words  to  be  interpreted 
are:  "Every  contract,  combination  in  the  form  of 
trust  or  otherwise  or  conspiracy  in  restraint  of  trade 
or  commerce  .  .  .  is  hereby  declared  to  be  illegal." 

As  there  is  no  room  for  dispute  that  the  statute  was 
intended  to  formulate  a  rule  for  the  regulation  of  in- 
terstate and  foreign  commerce,  the  question  is  what 
was  the  rule  which  it  adopted? 

In  view  of  the  common  law  and  the  law  in  this 
country  as  to  restraint  of  trade,  which  we  have  re- 
viewed, and  the  illuminating  effect  which  that  history 

JSwearingen  v.  United  States  (161  U.  S.,  446);  United 
States  v.  Wong  Kim  Ark  (169  U.  S.,  649)  ;  Keck  v.  United 
States  (172  U.  S.,  446) ;  Kepner  v.  United  States  (195  U.  S.t 
126). 

182 


OPINIONS   OF   CHIEF-JUSTICE   WHITE 

must  have  under  the  rule  to  which  we  have  referred, 
we  think  it  results: 

(a)  That  the  context  manifests  that  the  statute  was 
drawn  in  the  light  of  the  existing  practical  conception 
of  the  law  of  restraint  of  trade,  because  it  groups  as 
within  that  class,  not  only  contracts  which  were  in 
restraint  of  trade  in  the  subjective  sense,  but  all  con- 
tracts or  acts  which  theoretically  were  attempts  to 
monopolize,  yet  which  in  practice  had  come  to  be  con- 
sidered as  in  restraint  of  trade  in  a  broad  sense. 

(6)  That  in  view  of  the  many  new  forms  of  contracts 
and  combinations  which  were  being  evolved  from  exist- 
ing economic  conditions,  it  was  deemed  essential  by  an 
all-embracing  enumeration  to  make  sure  that  no  form 
of  contract  or  combination  by  which  an  undue  re- 
straint of  interstate  or  foreign  commerce  was  brought 
about  could  save  such  restraint  from  condemnation. 
The  statute  under  this  view  evidences  the  intent  not 
to  restrain  the  right  to  make  and  enforce  contracts, 
whether  resulting  from  combinations  or  otherwise, 
which  did  not  unduly  restrain  interstate  or  foreign 
commerce,  but  to  protect  that  commerce  from  being 
restrained  by  methods,  whether  old  or  new,  which 
would  constitute  an  interference  that  is  an  undue 
restraint. 

(c)  And  as  the  contracts  or  acts  embraced  in  the  pro- 
vision were  not  expressly  defined,  since  the  enumera- 
tion addressed  itself  simply  to  classes  of  acts,  those 
classes  being  broad  enough  to  embrace  every  conceiv- 
able contract  or  combination  which  could  be  made 
concerning  trade  or  commerce  or  the  subjects  of  such 
commerce,  and  thus  caused  any  act  done  by  any  of  the 
enumerated  methods  anywhere  in  the  whole  field  of 
human  activity  to  be  illegal  if  in  restraint  of  trade,  it 
inevitably  follows  that  the  provision  necessarily  called 

183 


APPENDIX   A 

for  the  exercise  of  judgment  which  required  that  some 
standard  should  be  resorted  to  for  the  purpose  of  deter- 
mining whether  the  prohibitions  contained  in  the 
statute  had  or  had  not  in  any  given  case  been  violated. 
Thus  not  specifying  but  indubitably  contemplating  and 
requiring  a  standard,  it  follows  that  it  was  intended 
that  the  standard  of  reason  which  had  been  applied  at 
the  common  law  and  in  this  country  in  dealing  with 
subjects  of  the  character  embraced  by  the  statute,  was 
intended  to  be  used  for  the  purpose  of  determining 
whether  in  a  given  case  a  particular  act  had  or  had  not 
brought  about  the  wrong  against  which  the  statute 
provided. 

And  a  consideration  of  the  text  of  the  second  section 
serves  to  establish  that  it  was  intended  to  supplement 
the  first  and  to  make  sure  that  by  no  possible  guise 
could  the  public  policy  embodied  in  the  first  section  be 
frustrated  or  evaded.  The  prohibitions  of  the  second 
embrace  "Every  person  who  shall  monopolize,  or  at- 
tempt to  monopolize,  or  combine  or  conspire  with  any 
other  person  or  persons,  to  monopolize  any  part  of  the 
trade  or  commerce  among  the  several  states,  or  with 
foreign  nations  .  .  . "  By  reference  to  the  terms 
of  Section  8  it  is  certain  that  the  word  "person"  clearly 
implies  a  corporation  as  well  as  an  individual. 

The  commerce  referred  to  by  the  words  "in  part" 
construed  in  the  light  of  the  manifest  purpose  of  the 
statute  has  both  a  geographical  and  a  distributive 
significance — that  is,  it  includes  any  portion  of  the 
United  States  and  any  one  of  the  classes  of  things 
forming  a  part  of  interstate  or  foreign  commerce. 

Undoubtedly,  the  words  "to  monopolize"  and  "mon- 
opolize," as  used  in  the  section  reach  every  act  bring- 
ing about  the  prohibited  results.  The  ambiguity,  if 
any,  is  involved  in  determining  what  is  intended  by 

184 


OPINIONS   OF  CHIEF-JUSTICE  WHITE 

monopolize.  But  this  ambiguity  is  readily  dispelled 
in  the  light  of  the  previous  history  of  the  law  of  re- 
straint of  trade  to  which  we  have  referred  and  the 
indication  which  it  gives  of  the  practical  evolution  by 
vvhich  monopoly  and  the  acts  which  produce  the  same 
result  as  monopoly — that  is,  an  undue  restraint  of  the 
course  of  trade — all  came  to  be  spoken  of  as  and  to  be, 
indeed,  synonymous  with  restraint  of  trade.  In  other 
words,  having  by  the  first  section  forbidden  all  means 
of  monopolizing  trade — that  is,  unduly  restraining  it 
by  means  of  every  contract,  combination,  etc. — the 
second  section  seeks,  if  possible,  to  make  the  prohibi- 
tions of  the  act  all  the  more  complete  and  perfect  by 
embracing  all  attempts  to  reach  the  end  prohibited  by 
the  first  section — that  is,  restraints  of  trade — by  any 
attempt  to  monopolize,  or  monopolization  thereof, 
even  although  the  acts  by  which  such  results  are  at- 
tempted to  be  brought  about  or  are  brought  about  be 
not  embraced  within  the  general  enumeration  of  the 
first  section.  And,  of  course,  when  the  second  section 
is  thus  harmonized  with  and  made,  as  it  was  intended 
to  be,  the  complement  of  the  first,  it  becomes  obvious 
that  the  criteria  to  be  resorted  to  in  any  given  case  for 
the  purpose  of  ascertaining  whether  violations  of  the 
section  have  been  committed  is  the  rule  of  reason 
guided  by  the  established  law  and  by  the  plain  duty  to 
enforce  the  prohibitions  of  the  act  and  thus  the  public 
policy  which  its  restrictions  were  obviously  enacted  to 
subserve.  And  it  is  worthy  of  observation,  as  we  have 
previously  remarked  concerning  the  common  law,  that 
although  the  statute,  by  the  comprehensiveness  of  the 
enumerations  embodied  in  both  the  first  and  second 
sections,  makes  it  certain  that  its  purpose  was  to  pre- 
vent undue  restraints  of  every  kind  or  nature,  never- 
theless, by  the  omission  of  any  direct  prohibition 

185 


APPENDIX  A 

against  monopoly  in  the  concrete,  it  indicates  a  con- 
sciousness that  the  freedom  of  the  individual  right  to 
contract,  when  not  unduly  or  improperly  exercised, 
was  the  most  efficient  means  for  the  prevention  of 
monopoly,  since  the  operation  of  the  centrifugal  and 
centripetal  forces  resulting  from  the  right  to  freely 
contract  was  the  means  by  which  monopoly  would  be 
inevitably  prevented  if  no  extraneous  or  sovereign 
power  imposed  it  and  no  right  to  make  unlawful  con- 
tracts having  a  monopolistic  tendency  were  permitted. 
In  other  words,  that  freedom  to  contract  was  the  es- 
sence of  freedom  from  undue  restraint  on  the  right  to 
contract. 

Clear,  as  it  seems  to  us  is  the  meaning  of  the  pro- 
visions of  the  statute,  in  the  light  of  the  review  which 
we  have  made,  nevertheless  before  definitely  applying 
that  meaning  it  behooves  us  to  consider  the  contentions 
urged  on  one  side  or  the  other  concerning  the  meaning 
of  the  statute,  which,  if  maintained,  would  give  to  it 
in  some  aspects  a  much  wider  and  in  every  view  at 
least  a  somewhat  different  significance.  And  to  do 
this  brings  us  to  the  second  question,  which,  at  the 
outset,  we  have  stated  it  was  our  purpose  to  consider 
and  dispose  of. 

Second.  The  contentions  of  the  parties  as  to  the 
meaning  of  the  statute  and  the  decisions  of  this  court 
relied  upon  concerning  those  contentions. 

In  substance,  the  propositions  urged  by  the  Govern- 
ment are  reducible  to  this:  That  the  language  of  the 
statute  embraces  every  contract,  combination,  etc.,  in 
restraint  of  trade,  and  hence  its  text  leaves  no  room  for 
the  exercise  of  judgment,  but  simply  imposes  the  plain 
duty  of  applying  its  prohibitions  to  every  case  within 
its  literal  language.  The  error  involved  lies  in  assum- 
ing the  matter  to  be  decided.  This  is  true  because,  as 

186 


OPINIONS   OF  CHIEF-JUSTICE  WHITE 

the  acts  which  may  come  under  the  classes  stated  in  the 
first  section  and  the  restraint  of  trade  to  which  that 
section  applies  are  not  specifically  enumerated  or  de- 
fined, it  is  obvious  that  judgment  must  in  every  case 
be  called  into  play  in  order  to  determine  whether  a 
particular  act  is  embraced  within  the  statutory  classes 
and  whether,  if  the  act  is  within  such  classes,  its  na- 
ture or  effect  causes  it  to  be  a  restraint  of  trade 
within  the  intendment  of  the  act.  To  hold  to  the 
contrary  would  require  the  conclusion  either  that 
every  contract,  act,  or  combination  of  any  kind  or  na- 
ture, whether  it  operated  a  restraint  on  trade  or  not, 
was  within  the  statute,  and  thus  the  statute  would  be 
destructive  of  all  right  to  contract  or  agree  or  combine 
in  any  respect  whatever  as  to  subjects  embraced  in 
interstate  trade  or  commerce,  or  if  this  conclusion 
were  not  reached,  then  the  contention  would  require 
it  to  be  held  that  as  the  statute  did  not  define  the 
things  to  which  it  related  and  excluded  resort  to  the 
only  means  by  which  the  acts  to  which  it  relates  could 
be  ascertained — the  light  of  reason — the  enforcement 
of  the  statute  was  impossible  because  of  its  uncertainty. 
The  merely  generic  enumeration  which  the  statute 
makes  of  the  acts  to  which  it  refers  and  the  absence  of 
any  definition  of  restraint  of  trade  as  used  in  the  stat- 
ute leaves  room  for  but  one  conclusion,  which  is  that 
it  was  expressly  designed  not  to  unduly  limit  the  ap- 
plication of  the  act  by  precise  definition,  but  while 
clearly  fixing  a  standard — that  is,  by  defining  the 
ulterior  boundaries  which  could  not  be  transgressed 
with  impunity — to  leave  it  to  be  determined  by  the 
light  of  reason,  guided  by  the  principles  of  law  and  the 
duty  to  apply  and  enforce  the  public  policy  embodied 
in  the  statute  in  every  given  case,  whether  any  particu- 
lar act  or  contract  was  within  the  contemplation  of 
the  statute.  -,  o« 


APPENDIX  A 

But,  it  is  said,  persuasive  as  these  views  may  be, 
they  may  not  be  here  applied,  because  the  previous  de- 
cisions of  this  court  have  given  to  the  statute  a  mean- 
ing which  expressly  excludes  the  construction  which 
must  result  from  the  reasoning  stated.  The  cases  are 
United  States  v.  Freight  Association  (166  U.  S.,  290) 
and  United  States  v.  Joint  Traffic  Association  (171 
U.  S,,  505).  Both  the  cases  involved  the  legality  of 
combinations  or  associations  of  railroads  engaged  in 
interstate  commerce  for  the  purpose  of  controlling  the 
conduct  of  the  parties  to  the  association  or  combination 
in  many  particulars.  The  association  or  combina- 
tion was  assailed  in  each  case  as  being  in  violation  of 
the  statute.  It  was  held  that  they  were.  It  is  undoubted 
that  in  the  opinion  in  each  case  general  language  was 
made  use  of  which,  when  separated  from  its  context, 
would  justify  the  conclusion  that  it  was  decided  that 
reason  could  not  be  resorted  to  for  the  purpose  of  de- 
termining whether  the  acts  complained  of  were  within 
the  statute.  It  is,  however,  also  true  that  the  nature  and 
character  of  the  contract  or  agreement  in  each  case  was 
fully  referred  to  and  suggestions  as  to  their  unreason- 
ableness pointed  out  in  order  to  indicate  that  they 
were  within  the  prohibitions  of  the  statute.  As  the 
cases  cannot  by  any  possible  conception  be  treated  as 
authoritative  without  the  certitude  that  reason  was 
resorted  to  for  the  purpose  of  deciding  them,  it  fol- 
lows as  a  matter  of  course  that  it  must  have  been  held 
by  the  light  of  reason,  since  the  conclusion  could  not 
have  been  otherwise  reached,  that  the  assailed  contracts 
or  agreements  were  within  the  general  enumeration  of 
the  statute,  and  that  their  operation  and  effect  brought 
about  the  restraint  of  trade  which  the  statute  prohibi- 
ted. This  being  inevitable,  the  deduction  can,  in  rea- 
son, only  be  this:  That  in  the  cases  relied  upon  it 

188 


OPINIONS   OF  CHIEF-JUSTICE  WHITE 

having  been  found  that  the  acts  complained  of  were 
within  the  statute  and  operated  to  produce  the  injuries 
which  the  statute  forbade,  that  resort  to  reason  was 
not  permissible  in  order  to  allow  that  to  be  done  which 
the  statute  prohibited.  This  being  true,  the  rulings 
in  the  cases  relied  upon,  when  rightly  appreciated,  were 
therefore  this  and  nothing  more :  That  as  considering 
the  contracts  or  agreements,  their  necessary  effect  and 
the  character  of  the  parties  by  whom  they  were  made, 
they  were  clearly  restraints  of  trade  within  the  pur- 
view of  the  statute,  they  could  not  be  taken  out  of  that 
category  by  indulging  in  general  reasoning  as  to  the 
expediency  or  non-expediency  of  having  made  the  con- 
tracts or  the  wisdom  or  want  of  wisdom  of  the  statute 
which  prohibited  their  being  made.  That  is  to  say, 
the  cases  but  decided  that  the  nature  and  character  of 
the  contracts,  creating  as  they  did  a  conclusive  pre- 
sumption which  brought  them  within  the  statute,  such 
result  was  not  to  be  disregarded  by  the  substitution  of 
a  judicial  appreciation  of  what  the  law  ought  to  be  for 
the  plain  judicial  duty  of  enforcing  the  law  as  it  was 
made. 

But  aside  from  reasoning  it  is  true  to  say  that  the 
cases  relied  upon  do  not  when  rightly  construed  sustain 
the  doctrine  contended  for  is  established  by  all  of  the 
numerous  decisions  of  this  court  which  have  applied 
and  enforced  the  antitrust  act,  since  they  all  in  the 
very  nature  of  things  rest  upon  the  premise  that  reason 
was  the  guide  by  which  the  provisions  of  the  act  were 
in  every  case  interpreted.  Indeed,  intermediate  the 
decision  of  the  two  cases — that  is,  after  the  decision  in 
the  freight  association  case  and  before  the  decision 
in  the  joint  traffic  case — the  case  of  Hopkins  v.  United 
States  (171  U.  S.,  578)  was  decided,  the  opinion  being 
delivered  by  Mr.  Justice  Peckham,  who  wrote  both  the 

189 


APPENDIX   A 

opinions  in  the  freight  association  and  in  the  joint 
traffic  cases.  And,  referring  'in  the  Hopkins  case  to 
the  broad  claim  made  as  to  the  rule  of  interpretation 
announced  in  the  freight  association  case,  it  was  said 
(p.  592): 

To  treat  as  condemned  by  the  act  all  agreements  under 
which,  as  a  result,  the  cost  of  conducting  an  interstate  com- 
mercial business  may  be  increased  would  enlarge  the  appli- 
cation of  the  act  far  beyond  the  fair  meaning  of  the  language 
used.  There  must  be  some  direct  and  immediate  effect  upon 
interstate  commerce  in  order  to  come  within  the  act. 

And  in  the  joint  traffic  case  this  statement  was  ex- 
pressly reiterated  and  approved  and  illustrated  by  ex- 
ample, like  limitation  on  the  general  language  used  in 
freight  association  and  joint  traffic  cases  is  also  the 
clear  result  of  Bement  v.  National  Harrow  Co.  (186 
U.  S.,  70,  92),  and  especially  of  Cincinnati  Packet  Co. 
v.  Bay  (200  U.  S.,  179). 

If  the  criterion  by  which  it  is  to  be  determined  in 
all  cases  whether  every  contract,  combination,  etc.,  is 
a  restraint  of  trade  within  the  intendment  of  the  law, 
is  the  direct  or  indirect  effect  of  the  acts  involved,  then 
of  course  the  rule  of  reason  becomes  the  guide,  and  the 
construction  which  we  have  given  the  statute,  instead 
of  being  refuted  by  the  cases  relied  upon,  is  by  those 
cases  demonstrated  to  be  correct.  This  is  true,  be- 
cause as  the  construction  which  we  have  deduced  from 
the  history  of  the  act  and  the  analysis  of  its  text  is 
simply  that  in  every  case  where  it  is  claimed  that  an 
act  or  acts  are  in  violation  of  the  statute  the  rule  of 
reason,  in  the  light  of  the  principles  of  law  and  the 
public  policy  which  the  act  embodies,  must  be  applied. 
From  this  it  follows,  since  that  rule  and  the  result 
of  the  test  as  to  direct  or  indirect,  in  their  ultimate 

190 


OPINIONS   OF   CHIEF- JUSTICE   WHITE 

aspect,  come  to  one  and  the  same  thing,  that  the  dif- 
ference between  the  two  is  therefore  only  that  which 
obtains  between  things  which  do  not  differ  at  all. 

If  it  be  true  that  there  is  this  identity  of  result  be- 
tween the  rule  intended  to  be  applied  in  the  freight 
association  case — that  is,  the  rule  of  direct  and  indi- 
rect, and  the  rule  of  reason  which,  under  the  statute 
as  we  construe  it,  should  be  here  applied — it  may  be 
asked  how  was  it  that  in  the  opinion  in  the  freight 
association  case  much  consideration  was  given  to  the 
subject  of  whether  the  agreement  or  combination  which 
was  involved  in  that  case  could  be  taken  out  of  the 
prohibitions  of  the  statute  upon  the  theory  of  its  rea- 
sonableness? The  question  is  pertinent  and  must  be 
fully  and  frankly  met,  for  if  it  be  now  deemed  that  the 
freight  association  case  was  mistakenly  decided  or  too 
broadly  stated,  the  doctrine  which  it  announced  should 
be  either  expressly  overruled  or  limited. 

The  confusion  which  gives  rise  to  the  question  re- 
sults from  failing  to  distinguish  between  the  want  of 
power  to  take  a  case  which  by  its  terms  or  the  circum- 
stances which  surrounded  it,  considering  among  such 
circumstances  the  character  of  the  parties,  is  plainly 
within  the  statute,  out  of  the  operation  of  the  statute 
by  resort  to  reason  in  effect  to  establish  that  the  con- 
tract ought  not  to  be  treated  as  within  the  statute  and 
the  duty  in  every  case  where  it  becomes  necessary 
from  the  nature  and  character  of  the  parties  to  decide 
whether  it  was  within  the  statute  to  pass  upon  that 
question  by  the  light  of  reason.  This  distinction,  we 
think,  serves  to  point  out  what  in  its  ultimate  concep- 
tion was  the  thought  underlying  the  reference  to  the 
rule  of  reason  made  in  the  freight  association  case, 
especially  when  such  reference  is  interpreted  by  the 
context  of  the  opinion  and  in  the  light  of  the  subse- 

191 


APPENDIX  A 

quent  opinion  in  the  Hopkins  case  and  in  Cincinnati 
Packet  Co.  v.  Bay. 

And  in  order,  not  in  the  slightest  degree  to  be  want- 
ing in  frankness,  we  say  that  in  so  far,  however,  as  by 
separating  the  general  language  used  in  the  opinions 
in  the  freight  association  and  joint  traffic  cases  from 
the  context  and  the  subject  and  parties  with  which  the 
cases  were  concerned,  it  may  be  conceived  that  the 
language  referred  to  conflicts  with  the  construction 
which  we  give  the  statute,  they  are  necessarily  now 
limited  and  qualified.  We  see  no  possible  escape  from 
this  conclusion  if  we  are  to  adhere  to  the  many  cases 
decided  in  this  court  in  which  the  antitrust  law  has 
been  applied  and  enforced,  and  if  the  duty  to  apply  and 
enforce  that  law  in  the  future  is  to  continue  to  exist. 
The  first  is  true,  because  the  construction  which  we 
now  give  the  statute  does  not  in  the  slightest  degree 
conflict  with  a  single  previous  case  decided  concerning 
the  antitrust  law  aside  from  the  contention  as  to  the 
freight  association  and  joint  traffic  cases,  and  because 
every  one  of  those  cases  applied  the  rule  of  reason  for 
the  purpose  of  determining  whether  the  subject  before 
the  court  was  within  the  statute.  The  second  is  also 
true,  since,  as  we  have  already  pointed  out,  unaided 
by  the  light  of  reason  it  is  impossible  to  understand 
how  the  statute  may  in  the  future  be  enforced  and  the 
public  policy  which  it  establishes  be  made  efficacious. 

So  far  as  the  objections  of  the  defendants  in  error 
are  concerned,  they  are  all  embraced  under  two  head- 
ings: 

(a)  That  the  act,  even  if  the  averments  of  the  bill 
be  true,  cannot  be  constitutionally  applied,  because  to 
do  so  would  extend  the  power  of  Congress  to  subject 
dehors  the  reach  of  its  authority  to  regulate  commerce, 
by  enabling  that  body  to  deal  with  mere  questions  of 

192 


OPINIONS   OF   CHIEF-JUSTICE   WHITE 

production  of  commodities  within  the  states.  But  all 
the  structure  upon  which  this  argument  proceeds  is 
based  upon  the  decision  in  United  States  v.  E.  C. 
Knight  Co.  (156  U.  S.,  1).  The  view,  however,  which 
the  argument  takes  of  that  case  and  the  arguments 
based  upon  that  view  have  been  so  repeatedly  pressed 
upon  this  court  in  connection  with  the  interpretation 
and  enforcement  of  the  antitrust  act,  and  have  been 
so  necessarily  and  expressly  decided  to  be  unsound,  as 
to  cause  the  contentions  to  be  plainly  foreclosed  and  to 
require  no  express  notice.  (United  States  v.  Northern 
Securities  Co.,  193  U.  S.,  334;  Loewe  v.  Lawler,  208 
U.  S.,  274;  United  States  v.  Swift  &  Co.,  196  U.  S., 
375;  Montague  v.  Lowry,  193  U.  S.,  38;  Shawnee  Com- 
press Co.  v.  Anderson,  209  U.  S.,  423.) 

(6)  Many  arguments  are  pressed  in  various  forms  of 
statement  which  in  substance  amount  to  contending 
that  the  statute  cannot  be  applied  under  the  facts  of 
this  case  without  impairing  rights  of  property  and 
destroying  the  freedom  of  contract  or  trade,  which  is 
essentially  necessary  to  the  well-being  of  society  and 
which  it  is  insisted  is  protected  by  the  constitutional 
guaranty  of  due  process  of  law.  But  the  ultimate 
foundation  of  all  these  arguments  is  the  assumption 
that  reason  may  not  be  resorted  to  in  interpreting  and 
applying  the  statute,  and  therefore  that  the  statute 
unreasonably  restricts  the  right  to  contract  and  unrea- 
sonably operates  upon  the  right  to  acquire  and  hold 
property.  As  the  premise  is  demonstrated  to  be 
unsound  by  the  construction  we  have  given  the  statute, 
of  course  the  propositions  which  rest  upon  that  premise 
need  not  be  further  noticed. 

So  far  as  the  arguments  proceed  upon  the  conception 
that  in  view  of  the  generality  of  the  statute  it  is  not 
susceptible  of  being  enforced  by  the  courts  because 

14  193 


APPENDIX   A 

it  cannot  be  carried  out  without  a  judicial  exertion 
of  legislative  power,  they  are  clearly  unsound.  The 
statute  certainly  generically  enumerates  the  character 
of  acts  which  it  prohibits  and  the  wrong  which  it  was 
intended  to  prevent.  The  propositions  therefore  but  in- 
sist that  consistently  with  the  fundamental  principles  of 
due  process  of  law  it  never  can  be  left  to  the  judiciary 
to  decide  whether  in  a  given  case  particular  acts  come 
within  a  generic  statutory  provision.  But  to  reduce 
the  propositions,  however,  to  this  their  final  meaning 
makes  it  clear  that  in  substance  they  deny  the  existence 
of  essential  legislative  authority  and  challenge  the  right 
of  the  judiciary  to  perform  duties  which  that  depart- 
ment of  the  Government  has  exerted  from  the  begin- 
ning. This  is  so  clear  as  to  require  no  elaboration. 
Yet,  let  us  demonstrate  that  which  needs  no  demonstra- 
tion by  a  few  obvious  examples.  Take,  for  instance, 
the  familiar  cases  where  the  judiciary  is  called  upon  to 
determine  whether  a  particular  act  or  acts  are  within 
a  given  prohibition,  depending  upon  wrongful  intent. 
Take  questions  of  fraud.  Consider  the  power  which 
must  be  exercised  in  every  case  where  the  courts  are 
called  upon  to  determine  whether  particular  acts  are 
invalid  which  are,  abstractly  speaking,  in  and  of  them- 
selves valid,  but  which  are  asserted  to  be  invalid  be- 
cause of  their  direct  effect  upon  interstate  commerce. 

From  the  American  Tobacco  Case 

If  the  antitrust  law  is  applicable  to  the  entire  situ- 
ation here  presented  and  is  adequate  to  afford  complete 
relief  for  the  evils  which  the  United  States  insists  that 
situation  presents,  it  can  only  be  because  that  law  will 
be  given  a  more  comprehensive  application  than  has 
been  affixed  to  it  in  any  previous  decision.  This  will 

194 


OPINIONS   OF   CHIEF-JUSTICE   WHITE 

be  the  case  because  the  undisputed  facts  as  we  have 
stated  them  involve  questions  as  to  the  operation  of  the 
antitrust  law  not  hitherto  presented  in  any  case. 
Thus,  even  if  the  ownership  of  stock  by  the  American 
Tobacco  Co.  in  the  accessory  and  subsidiary  companies 
and  the  ownership  of  stock  in  any  of  those  companies 
among  themselves  were  held,  as  was  decided  in  the 
Standard  Oil  Co.  case,  to  be  a  violation  of  the  act  and 
all  relations  resulting  from  such  stock  ownership  were 
therefore  set  aside,  the  question  would  yet  remain 
whether  the  principal  defendant,  the  American  Tobacco 
Co.,  and  the  five  accessory  defendants,  even  when 
divested  of  their  stock  ownership  in  other  corporations, 
by  virtue  of  the  power  which  they  would  continue  to 
possess,  even  although  thus  stripped,  would  amount  to  a 
violation  of  both  the  first  and  second  sections  of  the  act. 
Again,  if  it  were  held  that  the  corporations,  the  exist- 
ence whereof  was  due  to  a  combination  between  such 
companies  and  other  companies  was  a  violation  of  the 
act,  the  question  would  remain  whether  such  of  the 
companies  as  did  not  owe  their  existence  and  power  to 
combinations,  but  whose  power  alone  arose  from  the 
exercise  of  the  right  to  acquire  and  own  property, 
would  be  amenable  to  the  prohibitions  of  the  act.  Yet, 
further,  even  if  this  proposition  was  held  in  the  affir- 
mative, the  question  would  remain  whether  the  prin- 
cipal defendant,  the  American  Tobacco  Co.,  when 
stripped  of  its  stock  ownership,  would  be  in  and  of 
itself  within  the  prohibitions  of  the  act,  although  that 
company  was  organized  and  took  being  before  the  anti- 
trust act  was  passed.  Still  further,  the  question  would 
yet  remain  whether  particular  corporations  which, 
when  bereft  of  the  power  which  they  possessed  as  result- 
ing from  stock  ownership,  although  they  were  not 
inherently  possessed  of  a  sufficient  residuum  of  power 

195 


APPENDIX  A 

to  cause  them  to  be  in  and  of  themselves  either  a  re- 
straint of  trade  or  a  monopolization  or  an  attempt  to 
monopolize,  should  nevertheless  be  restrained  because 
of  their  intimate  connection  and  association  with  other 
corporations  found  to  be  within  the  prohibitions  of  the 
act.  The  necessity  of  relief  as  to  all  these  aspects,  we 
think,  seemed  to  the  Government  so  essential,  and  the 
difficulty  of  giving  to  the  act  such  a  comprehensive  and 
coherent  construction  as  would  be  adequate  to  enable 
it  to  meet  the  entire  situation,  led  to  what  appears  to 
us  to  be  in  their  essence  a  resort  to  methods  of  con- 
struction not  compatible  one  with  the  other.  And  the 
same  apparent  conflict  is  presented  by  the  views  of  the 
act  taken  by  the  defendants  when  their  contentions  are 
accurately  tested. 

Thus  the  Government,  for  the  purpose  of  fixing  the 
illegal  character  of  the  original  combination  which 
organized  the  old  American  Tobacco  Co.,  asserts  that 
the  illegal  character  of  the  combination  is  plainly 
shown  because  the  combination  was  brought  about  to 
stay  the  progress  of  a  flagrant  and  ruinous  trade  war. 

In  other  words,  the  contention  is  that  as  the  act  for- 
bids every  contract  and  combination  it  hence  prohibits 
a  reasonable  and  just  agreement  made  for  the  purpose 
of  ending  a  trade  war.  But  as  thus  construing  the  act 
by  the  rule  of  the  letter  which  kills  would  necessarily 
operate  to  take  out  of  the  reach  of  the  act  some  of  the 
accessory  and  many  subsidiary  corporations,  the  exist- 
ence of  which  depend  not  at  all  upon  combination  or 
agreement  or  contract,  but  upon  mere  purchases  of 
property,  it  is  insisted  in  many  forms  of  argument 
that  the  rule  of  construction  to  be  applied  must  be  the 
spirit  and  intent  of  the  act,  and  therefore  its  prohibi- 
tions must  be  held  to  extend  to  acts  even  if  not  within 
the  literal  terms  of  the  statute  if  they  are  within  its 

196 


OPINIONS   OF  CHIEF-JUSTICE  WHITE 

spirit,  because  done  with  an  intent  to  bring  about  the 
harmful  results  which  it  was  the  purpose  of  the  statute 
to  prohibit.  So  as  to  the  defendants.  While  it  is 
argued  on  the  one  hand  that  the  forms  by  which  various 
properties  were  acquired  in  view  of  the  letter  of  the 
act  exclude  many  of  the  assailed  transactions  from  con- 
demnation, it  is  yet  urged  that  giving  to  the  act  the 
broad  construction  which  it  should  rightfully  receive, 
whatever  may  be  the  form,  no  condemnation  should 
follow,  because  looking  at  the  case  as  a  whole  every  act 
assailed  is  shown  to  have  been  but  a  legitimate  and 
lawful  result  of  the  exertion  of  honest  business  methods 
brought  into  play  for  the  purpose  of  advancing  trade 
instead  of  with  the  object  of  obstructing  and  restraining 
the  same.  But  the  difficulties  which  arise,  from  the 
complexity  of  the  particular  dealings  which  are  here 
involved  and  the  situation  which  they  produce,  we  think 
grows  out  of  a  plain  misconception  of  both  the  letter 
and  spirit  of  the  antitrust  act.  We  say  of  the  letter, 
because  while  seeking  by  a  narrow  rule  of  the  letter  to 
include  things  which  it  is  deemed  would  otherwise  be 
excluded  the  contention  really  destroys  the  great  pur- 
pose of  the  act,  since  it  renders  it  impossible  to  apply 
the  law  to  a  multitude  of  wrongful  acts,  which  would 
come  within  the  scope  of  its  remedial  purposes  by  re- 
sort to  a  reasonable  construction,  although  they  would 
not  be  within  its  reach  by  a  too  narrow  and  unreason- 
able adherence  to  the  strict  letter.  This  must  be  the 
case  unless  it  be  possible  in  reason  to  say  that  for  the 
purpose  of  including  one  class  of  acts  which  would  not 
otherwise  be  embraced  a  literal  construction,  although 
in  conflict  with  reason,  must  be  applied,  and  for  the 
purpose  of  including  other  acts  which  would  not  other- 
wise be  embraced  a  reasonable  construction  must  be 
resorted  to.  That  is  to  say,  two  conflicting  rules  of 

197 


APPENDIX   A 

construction  must  at  one  and  the  same  time  be  applied 
and  adhered  to. 

The  obscurity  and  resulting  uncertainty,  however, 
is  now  but  an  abstraction,  because  it  has  been  removed 
by  the  consideration  which  we  have  given  quite  re- 
cently to  the  construction  of  the  antitrust  act  in  the 
Standard  Oil  case.  In  that  case  it  was  held,  without 
departing  from  any  previous  decision  of  the  court,  that 
as  the  statute  had  not  defined  the  words  "restraint  of 
trade, ' '  it  became  necessary  to  construe  those  words,  a 
duty  which  could  only  be  discharged  by  a  resort  to 
reason.  We  say  the  doctrine  thus  stated  was  in  accord 
with  all  the  previous  decisions  of  this  court,  despite 
the  fact  that  the  contrary  view  was  sometimes  errone- 
ously attributed  to  some  of  the  expressions  used  in  two 
prior  decisions.  (Trans-Missouri  Freight  Association 
and  Joint  Traffic  cases,  166  U.  S.,  290,  and  171  U.  S., 
505.)  That  such  view  was  a  mistaken  one  was  fully 
pointed  out  in  the  Standard  Oil  case  and  is  additionally 
shown  by  a  passage  in  the  opinion  in  the  Joint  Traffic 
case,  as  follows  (171  U.  S.,  568):  "The  act  of  Con- 
gress must  have  a  reasonable  construction  or  else  there 
would  scarcely  be  an  agreement  or  contract  among 
business  men  that  could  not  be  said  to  have,  indirectly 
or  remotely,  some  bearing  on  interstate  commerce,  and 
possibly  to  restrain  it."  Applying  the  rule  of  reason 
to  the  construction  of  the  statute,  it  was  held  in  the 
Standard  Oil  case  that  as  the  words  "restraint  of 
trade"  at  common  law  and  in  the  law  of  this  country 
at  the  time  of  the  adoption  of  the  antitrust  act  only 
embraced  acts  or  contracts  or  agreements  or  combina- 
tions which  operated  to  the  prejudice  of  the  public 
interests  by  unduly  restricting  competition  or  unduly 
obstructing  the  due  course  of  trade  or  which,  either 
because  of  their  inherent  nature  or  effect  or  because  of 

198 


OPINIONS   OF  CHIEF-JUSTICE  WHITE 

the  evident  purpose  of  the  acts,  etc.,  injuriously  re- 
strained trade,  that  the  words  as  used  in  the  statute 
were  designed  to  have  and  did  have  but  a  like  signifi- 
cance. It  was  therefore  pointed  out  that  the  statute 
did  not  forbid  or  restrain  the  power  to  make  normal 
and  usual  contracts  to  further  trade  by  resorting  to  all 
normal  methods,  whether  by  agreement  or  otherwise, 
to  accomplish  such  purpose. 

In  other  words,  it  was  held  not  that  acts  which  the 
statute  prohibited  could  be  removed  from  the  control 
of  its  prohibitions  by  a  finding  that  they  were  reason- 
able, but  that  the  duty  to  interpret  which  inevitably 
arose  from  the  general  character  of  the  term  "restraint 
of  trade, "  required  that  the  words  "restraint  of  trade" 
should  be  given  a  meaning  which  would  not  destroy 
the  individual  right  to  contract  and  render  difficult  if 
not  impossible  any  movement  of  trade  in  the  channels 
of  interstate  commerce — the  free  movement  of  which  it 
was  the  purpose  of  the  statute  to  protect.  The  sound- 
ness of  the  rule  that  the  statute  should  receive  a  rea- 
sonable construction,  after  further  mature  deliberation, 
we  see  no  reason  to  doubt.  Indeed,  the  necessity  for 
not  departing  in  this  case  from  the  standard  of  the  rule 
of  reason  which  is  universal  in  this  application  is  so 
plainly  required  in  order  to  give  effect  to  the  remedial 
purposes  which  the  act  under  consideration  contem- 
plates, and  to  prevent  that  act  from  destroying  all  lib- 
erty of  contract  and  all  substantial  right  to  trade,  and 
thus  causing  the  act  to  be  at  war  with  itself  by  anni- 
hilating the  fundamental  right  of  freedom  to  trade 
which,  on  the  very  face  of  the  act,  it  was  enacted  to 
preserve,  is  illustrated  by  the  record  before  us.  In 
truth,  the  plain  demonstration  which  this  record  gives 
of  the  injury  which  would  arise  from  and  the  promotion 
of  the  wrongs  which  the  statute  was  intended  to  guard 

199 


APPENDIX  A 

against  which  would  result  from  giving  to  the  statute 
a  narrow,  unreasoning,  and  unheard  of  construction, 
as  illustrated  by  the  record  before  us,  if  possible  serves 
to  strengthen  our  conviction  as  to  the  correctness  of  the 
rule  of  construction,  the  rule  of  reason,  which  was 
applied  in  the  Standard  Oil  case,  the  application  of 
which  rule  to  the  statute  we  now,  in  the  most  une- 
quivocal terms,  re-express  and  reaffirm. 

Coming  then  to  apply  to  the  case  before  us  the  act 
as  interpreted  in  the  Standard  Oil  and  previous  cases, 
all  the  difficulties  suggested  by  the  mere  form  in  which 
the  assailed  transactions  are  clothed  become  of  no 
moment.  This  follows  because,  although  it  was  held 
in  the  Standard  Oil  case  that,  giving  to  the  statute  a 
reasonable  construction,  the  words  "restraint  of  trade" 
did  not  embrace  all  those  normal  and  usual  contracts 
essential  to  individual  freedom  and  the  right  to  make 
which  were  necessary  in  order  that  the  course  of  trade 
might  be  free,  yet,  as  a  result  of  the  reasonable 
construction  which  was  affixed  to  the  statute,  it  was 
pointed  out  that  the  generic  designation  of  the  first 
and  second  sections  of  the  law,  when  taken  together, 
embraced  every  conceivable  act  which  could  possibly 
come  within  the  spirit  or  purpose  of  the  prohibitions 
of  the  law,  without  regard  to  the  garb  in  which  such 
acts  were  clothed.  That  is  to  say,  it  was  held  that  in 
view  of  the  general  language  of  the  statute  and  the 
public  policy  which  it  manifested,  there  was  no  pos- 
sibility of  frustrating  that  policy  by  resorting  to  any 
disguise  or  subterfuge  of  form,  since  resort  to  reason 
rendered  it  impossible  to  escape  by  any  indirection  the 
prohibitions  of  the  statute. 

Considering,  then,  the  undisputed  facts  which  we 
have  previously  stated,  it  remains  only  to  determine 
whether  they  establish  that  the  acts,  contracts,  agree- 

200 


OPINIONS   OF  CHIEF-JUSTICE   WHITE 

ments,  combinations,  etc.,  which  were  assailed  were  of 
such  an  unusual  and  wrongful  character  as  to  bring 
them  within  the  prohibitions  of  the  law.  That  they 
were,  in  our  opinion,  so  overwhelmingly,  results  from 
the  undisputed  facts  that  it  seems  only  necessary  to 
refer  to  the  facts  as  we  have  stated  them  to  demon- 
strate the  correctness  of  this  conclusion.  Indeed,  the 
history  of  the  combination  is  so  replete  with  the  doing 
of  acts  which  it  was  the  obvious  purpose  of  the  statute 
to  forbid,  so  demonstrative  of  the  existence  from  the 
beginning  of  a  purpose  to  acquire  dominion  and  control 
of  the  tobacco  trade,  not  by  the  mere  exertion  of  the 
ordinary  right  to  contract  and  to  trade,  but  by  methods 
devised  in  order  to  monopolize  the  trade  by  driving 
competitors  out  of  business,  which  were  ruthlessly  car- 
ried out  upon  the  assumption  that  to  work  upon  the 
fears  or  play  upon  the  cupidity  of  competitors  would 
make  success  possible.  We  say  these  conclusions  are 
inevitable,  not  because  of  the  vast  amount  of  property 
aggregated  by  the  combination,  not  because  alone  of  the 
many  corporations  which  the  proof  shows  were  united 
by  resort  to  one  device  or  another.  Again,  not  alone 
because  of  the  dominion  and  control  over  the  tobacco 
trade  which  actually  exists,  but  because  we  think  the 
conclusion  of  wrongful  purpose  and  illegal  combination 
is  overwhelmingly  established  by  the  following  consid- 
erations: 

(a)  By  the  fact  that  the  very  first  organization  or 
combination  was  impelled  by  a  previously  existing  fierce 
trade  war,  evidently  inspired  by  one  or  more  of  the 
minds  which  brought  about  and  became  parties. to  that 
combination. 

(6)  Because,  immediately  after  that  combination  and 
the  increase  of  capital  which  followed,  the  acts  which 
ensued  justify  the  inference  that  the  intention  existed 

201 


APPENDIX  A 

to  use  the  power  of  the  combination  as  a  vantage  ground 
to  further  monopolize  the  trade  in  tobacco  by  means  of 
trade  conflicts  designed  to  injure  others,  either  by 
driving  competitors  out  of  the  business  or  compelling 
them  to  become  parties  to  a  combination — a  purpose 
whose  execution  was  illustrated  by  the  plug  war  which 
ensued  and  its  results,  by  the  snuff  war  which  followed 
and  its  results,  and  by  the  conflicts  which  immediately 
followed  the  entry  of  the  combination  in  England  and 
the  division  of  the  world's  business  by  the  two  foreign 
contracts  which  ensued. 

(c)  By  the  ever-present  manifestation  which  is  ex- 
hibited of  a  conscious  wrongdoing  by  the  form  in  which 
the  various  transactions  were  embodied  from  the  be- 
ginning, ever  changing  but  ever  in  substance  the  same. 
Now  the  organization  of  a  new  company,  now  the  con- 
trol exerted  by  the  taking  of  stock  in  one  or  another  or 
in  several,  so  as  to  obscure  the  result  actually  attained, 
nevertheless  uniform,  in  their  manifestations  of   the 
purpose  to  restrain  others  and  to  monopolize  and  retain 
power  in  the  hands  of  the  few  who,  it  would  seem, 
from  the  beginning  contemplated  the  mastery  of  the 
trade  which  practically  followed. 

(d)  By  the  gradual  absorption  of  control  over  all  the 
elements  essential  to  the  successful    manufacture  of 
tobacco  products,  and  placing  such  control  in  the  hands 
of  seemingly  independent  corporations  serving  as  per- 
petual barriers  to  the  entry  of  others  into  the  tobacco 
trade. 

(e)  By  persistent  expenditure  of  millions  upon  mil- 
lions of  dollars  in  buying  out  plants,  not  for  the  pur- 
pose of  utilizing  them,  but  in  order  to  close  them  up 
and  render  them  useless  for  the  purposes  of  trade. 

(/)  By  the  constantly  recurring  stipulations,  whose 
legality,  isolatedly  viewed,  we  are  not  considering,  by 

202 


OPINIONS   OF  CHIEF-JUSTICE  WHITE 

which  numbers  of  persons,  whether  manufacturers, 
stockholders  or  employees,  were  required  to  bind  them- 
selves, generally  for  long  periods,  not  to  compete  in 
the  future.  Indeed,  when  the  results  of  the  undisputed 
proof  which  we  have  stated  are  fully  apprehended,  and 
the  wrongful  acts  which  they  exhibit  are  considered, 
there  comes  inevitably  to  the  mind  the  conviction  that 
it  was  the  danger  which  it  was  deemed  would  arise  to 
individual  liberty  and  the  public  well-being  from  acts 
like  those  which  this  record  exhibits,  which  led  the 
legislative  mind  to  conceive  and  to  enact  the  antitrust 
act,  considerations  which  also  serve  to  clearly  demon- 
strate that  the  combination  here  assailed  is  within  the 
law  as  to  leave  no  doubt  that  it  is  our  plain  duty  to 
apply  its  prohibitions. 

In  stating  summarily,  as  we  have  done,  the  conclu- 
sions which,  in  our  opinion,  are  plainly  deducible  from 
the  undisputed  facts,  we  have  not  paused  to  give  the 
reasons  why  we  consider,  after  great  consideration, 
that  the  elaborate  arguments  advanced  to  affix  a  differ- 
ent complexion  to  the  case  are  wholly  devoid  of  merit. 
We  do  not,  for  the  sake  of  brevity,  moreover,  stop  to 
examine  and  discuss  the  various  propositions  urged  in 
the  argument  at  bar  for  the  purpose  of  demonstrating 
that  the  subject  matter  of  the  combination  which  we 
find  to  exist  and  the  combination  itself  are  not  within 
the  scope  of  the  antitrust  law,  because  when  rightly 
considered  they  are  merely  matters  of  intrastate  com- 
merce, and  therefore  subject  alone  to  state  control. 
We  have  done  this  because  the  want  of  merit  in  all  the 
arguments  advanced  on  such  subjects  is  so  completely 
established  by  the  prior  decisions  of  this  court,  as 
pointed  out  in  the  Standard  Oil  case,  as  not  to  require 
restatement. 

Leading  as  this  does  to  the  conclusion  that  the  as- 

203 


APPENDIX  A 

sailed  combination  in  all  its  aspects — that  is  to  say, 
whether  it  be  looked  at  from  the  point  of  view  of  stock 
ownership  or  from  the  standpoint  of  the  principal  cor- 
poration and  the  accessory  or  subsidiary  corporations 
viewed  independently,  including  the  foreign  corpora- 
tions in  so  far  as  by  the  contracts  made  by  them  they 
became  co-operators  in  the  combination — comes  within 
the  prohibitions  of  the  first  and  second  sections  of  the 
antitrust  act,  it  remains  only  finally  to  consider  the 
remedy  which  it  is  oar  doty  to  apply  to  the  situation 
thus  found  to  exist. 


APPENDIX    B 


THE  DISSENTING  OPINION  OF  JUSTICE 


MR.  JUSTICE  HARULN,  concurring  in  part  and  dis- 
senting in  part: 

A  sense  of  duty  constrains  me  to  express  the  objec- 
tions which  I  have  to  certain  declarations  in  the  opinion 
just  delivered  on  behalf  of  the  court. 

I  concur  in  holding  that  the  Standard  Oil  Co.  of  New 
Jersey  and  its  subsidiary  companies  constitute  a  com- 
bination in  restraint  of  interstate  commerce,  and  that 
they  have  attempted  to  monopolize  and  have  monopo- 
lized parts  of  such  commerce  —  all  in  violation  of  what 
is  known  as  the  antitrust  act  of  1890.  (26  Stat.,  209, 
c.  647.)  The  evidence  in  this  case  overwhelmingly 
sustained  that  view  and  led  the  circuit  court,  by  its 
final  decree,  to  order  the  dissolution  of  the  New  Jersey 
corporation  and  the  discontinuance  of  the  illegal  com- 
bination between  that  corporation  and  its  subsidiary 
companies. 

In  my  judgment,  the  decree  below  should  have  been 
affirmed  without  qualification.  But  the  court,  while 
affirming  the  decree,  directs  some  modifications  in  re- 
spect of  what  it  characterizes  as  "minor  matters."  It 
is  to  be  apprehended  that  those  modifications  may 
prove  to  be  mischievous.  In  saying  this  I  have  partic- 
ularly in  view  the  statement  in  the  opinion  that  "it 

MG 


APPENDIX   B 

does  not  necessarily  follow  that  because  an  illegal  re- 
straint of  trade  or  an  attempt  to  monopolize  or  a 
monopolization  resulted  from  the  combination  and  the 
transfer  of  the  stocks  of  the  subsidiary  corporations  to 
the  New  Jersey  corporation,  that  a  like  restraint  of 
trade  or  attempt  to  monopolize  or  monopolization  would 
necessarily  arise  from  agreements  between  one  or  more 
of  the  subsidiary  corporations  after  the  transfer  of  the 
stock  by  the  New  Jersey  corporation."  Taking  this 
language,  in  connection  with  other  parts  of  the  opin- 
ion, the  subsidiary  companies  are  thus,  in  effect,  in- 
formed— unwisely,  I  think — that,  although  the  New 
Jersey  corporation,  being  an  illegal  combination,  must 
go  out  of  existence,  they  may  join  in  an  agreement  to 
restrain  commerce  among  the  states  if  such  restraint 
be  not  "undue." 

In  order  that  my  objection  to  certain  parts  of  the 
court's  opinion  may  distinctly  appear,  I  must  state  the 
circumstances  under  which  Congress  passed  the  anti- 
trust act  and  trace  the  course  of  judicial  decisions  as  to 
its  meaning  and  scope.  This  is  the  more  necessary 
because  the  court,  by  its  decision,  when  interpreted  by 
the  language  of  its  opinion,  has  not  only  upset  the  long- 
settled  interpretation  of  the  act,  but  has  usurped  the 
constitutional  functions  of  the  legislative  branch  of  the 
Government.  With  all  due  respect  for  the  opinions  of 
others,  I  feel  bound  to  say  that  what  the  court  has  said 
may  well  cause  some  alarm  for  the  integrity  of  our  in- 
stitutions. Let  us  see  how  the  matter  stands. 

All  who  recall  the  condition  of  the  country  in  1890 
will  remember  that  there  was  everywhere  among  the 
people  generally  a  deep  feeling  of  unrest.  The  na- 
tion had  been  rid  of  human  slavery — fortunately,  as  all 
now  feel — but  the  conviction  was  universal  that  the 
country  was  in  real  danger  from  another  kind  of  slav- 

206 


OPINION   OF  JUSTICE   HARLAN 

ery  sought  to  be  fastened  on  the  American  people, 
namely,  the  slavery  that  would  result  from  aggregations 
of  capital  in  the  hands  of  a  few  individuals  and  cor- 
porations controlling,  for  their  own  profit  and  advan- 
tage exclusively,  the  entire  business  of  the  country, 
including  the  production  and  sale  of  the  necessaries  of 
life.  Such  a  danger  was  thought  to  be  then  imminent, 
and  all  felt  that  it  must  be  met  firmly  and  by  such 
statutory  regulations  as  would  adequately  protect  the 
people  against  oppression  and  wrong.  Congress  there- 
fore took  up  the  matter  and  gave  the  whole  subject  the 
fullest  consideration.  All  agreed  that  the  National 
Government  could  not,  by  legislation,  regulate  the 
domestic  trade  carried  on  wholly  within  the  several 
states;  for  power  to  regulate  such  trade  remained  with, 
because  never  surrendered  by,  the  states.  But,  under 
authority  expressly  granted  to  it  by  the  Constitution, 
Congress  could  regulate  commerce  among  the  several 
states  and  with  foreign  states.  Its  authority  to  such 
commerce  was  and  is  paramount,  due  force  being  given 
to  other  provisions  of  the  fundamental  law  devised  by 
the  fathers  for  the  safety  of  the  Government  and  for 
the  protection  and  security  of  the  essential  rights 
inhering  in  life,  liberty,  and  property. 

Guided  by  these  considerations,  and  to  the  end  that 
the  people,  so  far  as  interstate  commerce1  was  con- 
cerned, might  not  be  dominated  by  vast  combinations 
and  monopolies,  having  power  to  advance  their  own 
selfish  ends,  regardless  of  the  general  interests  and 
welfare,  Congress  passed  the  antitrust  act  of  1890 
(see  Appendix  C). 

The  important  inquiry  in  the  present  case  is  as  to 

1  All  italics  are  Justice  Harlan's. 
207 


APPENDIX   B 

the  meaning  and  scope  of  that  act  in  its  application  to 
interstate  commerce. 

In  1896  this  court  had  occasion  to  determine  the 
meaning  and  scope  of  the  act  in  an  important  case 
known  as  the  Trans-Missouri  Freight  case.  (166  U. 
S.,  290.)  The  question  there  was  as  to  the  validity 
under  the  antitrust  act  of  a  certain  agreement  between 
numerous  railroad  companies,  whereby  they  formed  an 
association  for  the  purpose  of  establishing  and  main- 
taining rates,  rules,  and  regulations  in  respect  of 
freight  traffic  over  specified  routes.  Two  questions 
were  involved:  First,  whether  the  act  applied  to  rail- 
road carriers;  second,  whether  the  agreement  which 
was  the  basis  of  the  suit  which  the  United  States 
brought  to  have  the  agreement  annulled  was  illegal. 
The  court  held  that  railroad  carriers  were  embraced  by 
the  act.  In  determining  that  question  the  court,  among 
other  things,  said: 

The  language  of  the  act  includes  every  contract,  combina- 
tion in  the  form  of  trust  or  otherwise,  or  conspiracy  in  re- 
straint of  trade  or  commerce  among  the  several  states  or 
with  foreign  nations.  So  far  as  the  very  terms  of  the  statute 
go,  they  apply  to  any  contract  of  the  nature  described.  A 
contract  therefore  that  is  in  restraint  of  trade  or  commerce 
is  by  the  strict  language  of  the  act  prohibited,  even  though 
such  contract  is  entered  into  between  competing  common 
carriers  by  railroad,  and  only  for  the  purposes  of  thereby 
affecting  traffic  rates  for  the  transportation  of  persons  and* 
property.  If  such  an  agreement  restrains  trade  or  com- 
merce, it  is  prohibited  by  the  statute,  unless  it  can  be  said 
that  an  agreement,  no  matter  what  its  terms,  relating  only 
to  transportation  cannot  restrain  trade  or  commerce.  We 
see  no  escape  from  the  conclusion  that  if  an  agreement  of 
such  a  nature  does  restrain  it  the  agreement  is  condemned  by 
this  act.  .  .  .  Nor  is  it  for  the  substantial  interests  of 
the  country  that  any  one  commodity  should  be  within  the 
sole  power  and  subject  to  the  sole  will  of  one  powerful  com- 
bination of  capital.  Congress  has,  so  far  as  its  jurisdiction 

208 


OPINION   OF  JUSTICE   HARLAN 

extends,  prohibited  all  contracts  or  combinations  in  the  form 
of  trusts  entered  into  for  the  purpose  of  restraining  trade 
and  commerce.  .  .  .  While  the  statute  prohibits  all  com- 
binations in  the  form  of  trusts  or  otherwise,  the  limitation 
is  not  confined  to  that  form  alone.  All  combinations  which 
are  in  restraint  of  trade  or  commerce  are  prohibited,  whether 
in  the  form  of  trusts  or  in  any  other  form  whatever.  (U. 
S.  v.  Freight  Asso.,  166  U.  S.,  290,  312,  324,  326.) 

The  court  then  proceeded  to  consider  the  second  of 
the  above  questions,  saying: 

The  next  question  to  be  discussed  is  as  to  what  is  the 
true  construction  of  the  statute,  assuming  that  it  applies  to 
common  carriers  by  railroad.  What  is  the  meaning  of  the 
language  as  used  in  the  statute,  that  "every  contract,  com- 
bination in  the  form  of  trust  or  otherwise,  or  conspiracy  in 
restraint  of  trade  or  commerce  among  the  several  states  or 
with  foreign  nations,  is  hereby  declared  to  be  illegal"?  Is 
it  confined  to  a  contract  or  combination  which  is  only  in  un- 
reasonable restraint  of  trade  or  commerce,  or  does  it  include 
what  the  language  of  the  act  plainly  and  in  terms  covers,  all 
contracts  of  that  nature?  It  is  now  with  much  amplification 
of  argument  urged  that  the  statute,  in  declaring  illegal 
every  combination  in  the  form  of  trust  or  otherwise,  or  con- 
spiracy in  restraint  of  trade  or  commerce  does  not  mean 
what  the  language  used  therein  plainly  imports,  but  that  it 
only  means  to  declare  illegal  any  such  contract  which  is  in 
unreasonable  restraint  of  trade,  while  leaving  all  others 
unaffected  by  the  provisions  of  the  act ;  that  the  common- 
law  meaning  of  the  term  "contract  in  restraint  of  trade" 
includes  only  such  contracts  as  are  in  unreasonable  restraint 
of  trade,  and  when  that  term  is  used  in  the  Federal  statute 
it  is  not  intended  to  include  all  contracts  in  restraint  of  trade, 
but  only  those  which  are  in  unreasonable  restraint  thereof. 
.  .  .  By  the  simple  use  of  the  term  "contract  in  restraint 
of  trade,"  all  contracts  of  that  nature,  whether  valid  or 
otherwise,  would  be  included,  and  not  alone  that  kind  of  con- 
tract which  was  invalid  and  unenforceable  as  being  in  un- 
reasonable restraint  of  trade.  When,  therefore,  the  body  of 
an  act  pronounces  as  illegal  every  contract  or  combination 
in  restraint  of  trade  or  commerce  among  the  several  states, 

16  209 


APPENDIX   B 

etc.,  the  plain  and  ordinary  meaning  of  such  language  is  not 
limited  to  that  kind  of  contract  alone  which  is  in  unreason- 
able restraint  of  trade,  but  all  contracts  are  included  in  such 
language,  and  no  exception  or  limitation  can  be  added  with- 
out placing  in  the  act  that  which  has  been  omitted  by  Con- 
gress. ...  If  only  that  kind  of  contract  which  is  in 
unreasonable  restraint  of  trade  be  within  the  meaning  of  the 
statute,  and  declared  therein  to  be  illegal,  it  is  at  once  appar- 
ent that  the  subject  of  what  is  a  reasonable  rate  is  attended 
with  great  uncertainty.  ...  To  say,  therefore,  that  the 
act  excludes  agreements  which  are  not  in  unreasonable  re- 
straint of  trade,  and  which  tend  simply  to  keep  up  reasonable 
rates  fox  transportation,  is  substantially  to  leave  the  ques- 
tion of  unreasonableness  to  the  companies  themselves. 
.  .  .  But  assuming  that  agreements  of  this  nature  are 
not  void  at  common  law  and  that  the  various  cases  cited  by 
the  learned  courts  below  show  it,  the  answer  to  the  state- 
ment of  their  validity  now  is  to  be  found  in  the  terms  of  the 
statute  under  consideration.  .  .  .  The  arguments  which 
have  been  addressed  to  us  against  the  inclusion  of  all  con- 
tracts in  restraint  of  trade,  as  provided  for  by  the  language 
of  the  act,  have  been  based  upon  the  alleged  presumption 
that  Congress,  notwithstanding  the  language  of  the  act,  could 
not  have  intended  to  embrace  all  contracts,  but  only  such 
contracts  as  were  in  unreasonable  restraint  of  trade.  Under 
these  circumstances  we  are,  therefore,  asked  to  hold  that 
the  act  of  Congress  excepts  contracts  which  are  not  in  un- 
reasonable restraint  of  trade,  and  which  only  keep  rates  up 
to  a  reasonable  price,  notwithstanding  the  language  of  the 
act  makes  no  such  exception.  In  other  words,  we  are  asked 
to  read  into  the  act  by  way  of  judicial  legislation  an  excep- 
tion that  is  not  placed  there  by  the  lawmaking  branch  of  the 
Government,  and  this  is  to  be  done  upon  the  theory  that  the 
impolicy  of  such  legislation  is  so  clear  that  it  cannot  be 
supposed  Congress  intended  the  natural  import  of  the  lan- 
guage it  used.  This  we  cannot  and  ought  not  to  do.  .  .  . 
If  the  act  ought  to  read,  as  contended  for  by  defendants, 
Congress  is  the  body  to  amend  it  and  not  this  court,  by  a 
process  of  judicial  legislation  wholly  unjustifiable.  Large 
numbers  do  not  agree  that  the  view  taken  by  defendants  is 
sound  or  true  in  substance,  and  Congress  may  and  very  prob- 
ably did  share  in  that  belief  in  passing  the  act.  The  public 
policy  of  the  Government  is  to  be  found  in  its  statutes,  and 

210 


-  OPINION   OF  JUSTICE   HARLAN 

when  they  have  not  directly  spoken,  then  in  the  decisions  of 
the  courts  and  the  constant  practice  of  the  Government  offi- 
cials ;  but  when  the  lawmaking  power  speaks  upon  a  particu- 
lar subject,  over  which  it  has  constitutional  power  to  legis- 
late, public  policy  in  such  a  case  is  what  the  statute  enacts. 
If  the  law  prohibit  any  contract  or  combination  in  restraint 
of  trade  or  commerce,  a  contract  or  combination  made  in 
violation  of  such  law  is  void,  whatever  may  have  been  there- 
tofore decided  by  the  courts  to  have  been  the  public  policy 
of  the  country  on  that  subject.  The  conclusion  which  we 
have  drawn  from  the  examination  above  made  into  the  ques- 
tion before  us  is  that  the  antitrust  act  applies  to  railroads, 
and  that  it  renders  illegal  all  agreements  which  are  in  re- 
straint of  trade  or  commerce  as  we  have  above  defined  that 
expression,  and  the  question  then  arises  whether  the  agree- 
ment before  us  is  of  that  nature. 

I  have  made  these  extended  extracts  from  the  opinion 
of  the  court  in  the  Trans-Missouri  Freight  case  in  order 
to  show  beyond  question  that  the  point  was  there  urged 
by  counsel  that  the  antitrust  act  condemned  only 
contracts,  combinations,  trusts,  and  conspiracies  that 
were  in  unreasonable  restraint  of  interstate  commerce, 
and  that  the  court  in  clear  and  decisive  language  met 
that  point.  It  adjudged  that  Congress  had  in  unequivo- 
cal words  declared  that '  'every  contract,  combination,  in 
the  form  of  trust  or  otherwise,  or  conspiracy  in  restraint 
of  commerce  among  the  several  states"  shall  be  illegal, 
and  that  no  distinction,  so  far  as  interstate  commerce 
was  concerned,  was  to  be  tolerated  between  restraints 
of  such  commerce  as  were  undue  or  unreasonable  and 
restraints  that  were  due  or  reasonable.  With  full 
knowledge  of  the  then  condition  of  the  country 
and  of  its  business,  Congress  determined  to  meet,  and 
did  meet,  the  situation  by  an  absolute,  statutory  pro- 
hibition of  "every  contract,  combination,  in  the  form 
of  trust  or  otherwise,  in  restraint  of  trade  or  com- 
merce." Still  more,  in  response  to  the  suggestion  by 

211 


APPENDIX   B 

able  counsel  that  Congress  intended  only  to  strike  down 
such  contracts,  combinations,  and  monopolies  as  un- 
reasonably restrained  interstate  commerce,  this  court, 
in  words  too  clear  to  be  misunderstood,  said  that  to  so 
hold  was  "to  read  into  the  act  by  way  of  judicial 
legislation,  an  exception  not  placed  there  by  the  law- 
making  branch  of  the  Government."  "This,"  the 
court  said,  as  we  have  seen  "we  cannot  and  ought 
not  to  do." 

It  thus  appears  that  fifteen  years  ago,  when  the  pur- 
pose of  Congress  in  passing  the  antitrust  act  was  fresh 
in  the  minds  of  courts,  lawyers,  statesmen,  and  the  gen- 
eral public,  this  court  expressly  declined  to  indulge  in 
judicial  legislation,  by  inserting  in  the  act  the  word 
"unreasonable"  or  any  other  word  of  like  import.  It 
may  be  stated  here  that  the  country  at  large  accepted 
this  view  of  the  act,  and  the  Federal  courts  throughout 
the  entire  country  enforced  its  provisions  according  to 
the  interpretation  given  in  the  Freight  Association 
case.  What,  then,  was  to  be  done  by  those  who  ques- 
tioned the  soundness  of  the  interpretation  placed  on 
the  act  by  this  court  in  that  case?  As  the  court  had 
decided  that  to  insert  the  word  "unreasonable"  in  the 
act  would  be  "judicial  legislation"  on  its  part,  the 
only  alternative  left  to  those  who  opposed  the  decision 
in  that  case  was  to  induce  Congress  to  so  amend  the 
act  as  to  recognize  the  right  to  restrain  interstate 
commerce  to  a  reasonable  extent.  The  public  press, 
magazines,  and  law  journals,  the  debates  in  Congress, 
speeches  and  addresses  by  public  men  and  jurists,  all 
contain  abundant  evidence  of  the  general  understand- 
ing that  the  meaning,  extent,  and  scope  of  the  anti- 
trust act  had  been  judicially  determined  by  this  court, 
and  that  the  only  question  remaining  open  for  discussion 
was  the  wisdom  of  the  policy  declared  by  the  act — a 

212 


OPINION   OF   JUSTICE   HARLAN 

matter  that  was  exclusively  within  the  cognizance  of 
Congress.  But  at  every  session  of  Congress  since  the 
decision  of  1896,  the  lawmaking  branch  of  the  Govern- 
ment, with  full  knowledge  of  that  decision,  has  refused 
to  change  the  policy  it  had  declared  or  to  so  amend  the 
act  of  1890  as  to  except  from  its  operation  contracts, 
combinations,  and  trusts  that  reasonably  restrain  in- 
terstate commerce. 

But  those  who  were  in  combinations  that  were 
illegal  did  not  despair.  They  at  once  set  up  the  base- 
less claim  that  the  decision  of  1896  disturbed  the 
"business  interests  of  the  country,"  and  let  it  be 
known  that  they  would  never  be  content  until  the  rule 
was  established  that  would  permit  interstate  commerce 
to  be  subjected  to  reasonable  restraints.  Finally,  an 
opportunity  came  again  to  raise  the  same  question 
which  this  court  had,  upon  full  consideration,  deter- 
mined in  1896.  I  now  allude  to  the  case  of  United 
States  v.  Joint  Traffic  Association,  171  U.  S.,  505, 
decided  in  1898.  What  was  that  case? 

It  was  a  suit  by  the  United  States  against  more  than 
thirty  railroad  companies  to  have  the  court  declare 
illegal,  under  the  antitrust  act,  a  certain  agreement 
between  these  companies.  The  relief  asked  was  denied 
in  the  subordinate  Federal  courts  and  the  Government 
brought  the  case  here. 

It  is  important  to  state  the  points  urged  in  that  case 
by  the  defendant  companies  charged  with  violating  the 
antitrust  act,  and  to  show  that  the  court  promptly  met 
them.  To  that  end  I  make  a  copious  extract  from  the 
opinion  in  the  Joint  Traffic  case.  Among  other  things, 
the  court  said: 

Upon  comparing  that  agreement  [the  one  in  the  Joint 
Traffic  case,  then  under  consideration,  171  U.  S.f  505]  with 
the  one  set  forth  in  the  case  of  United  States  v.  Trans- 

213 


APPENDIX   B 

Missouri  Freight  Association,  166  U.  S.,  290,  the  great  sim- 
ilarity between  them  suggests  that  a  similar  result  should 
be  reached  in  the  two  cases  (p.  558). 

Learned  counsel  in  the  Joint  Traffic  case  urged  a 
reconsideration  of  the  question  decided  in  the  Trans- 
Missouri  case,  contending  that  "the  decision  in  that 
case  [the  Trans-Missouri  Freight  case]  is  quite  plainly 
erroneous,  and  the  consequences  of  such  error  are  far- 
reaching  and  disastrous  and  clearly  at  war  with  justice 
and  sound  policy,  and  the  construction  placed  upon  the 
antitrust  statute  has  been  received  by  the  public  with 
surprise  and  alarm."  They  suggested  that  the  point 
made  in  the  Joint  Traffic  case  as  to  the  meaning  and 
scope  of  the  act  might  have  been  but  was  not  made  in 
the  previous  case.  The  court  said  (171  U.  S.,  559) 
that  "the  report  of  the  Trans-Missouri  case  clearly 
shows  not  only  that  the  point  now  taken  was  there 
urged  upon  the  attention  of  the  court,  but  it  was  then 
intentionally  and  necessarily  decided." 

The  question  whether  the  court  should  again  consider 
the  point  decided  in  the  Trans-Missouri  case  was  dis- 
posed of  in  the  most  decisive  language  as  follows: 

Finally,  we  are  asked  to  reconsider  the  question  decided 
in  the  Trans-Missouri  case,  and  to  retrace  the  steps  taken 
therein,  because  of  the  plain  error  contained  in  that  deci- 
sion and  the  widespread  alarm  |with  which  it  was  received 
and  the  serious  consequences  which  have  resulted,  or  may 
soon  result,  from  the  law  as  interpreted  in  that  case.  It  is 
proper  to  remark  that  an  application  for  a  reconsideration 
of  a  question  but  lately  decided  by  this  court  is  usually  based 
upon  a  statement  that  some  of  the  arguments  employed  on 
the  original  hearing  of  the  question  have  been  overlooked  or 
misunderstood,  or  that  some  controlling  authority  has  been 
either  misapplied  by  the  court  or  passed  over  without  dis- 
cussion or  notice.  While  this  is  not  strictly  an  application 
for  a  rehearing  in  the  same  case,  yet  in  substance  it  is  the 

214 


OPINION   OF  JUSTICE  HARLAN 

same  thing.  The  court  is  asked  to  reconsider  a  question  but 
just  decided  after  a  careful  investigation  of  the  matter  in- 
volved. There  have  heretofore  been  in  effect  two  arguments 
of  precisely  the  same  questions  now  before  the  court,  and 
the  same  arguments  were  addressed  to  us  on  both  those  oc- 
casions. The  report  of  the  Trans-Missouri  ease  shows  a  dis- 
senting opinion  delivered  in  that  case,  and  that  the  opinion 
was  concurred  in  by  three  other  members  of  the. court.  That 
opinion,  it  will  be  seen,  gives  with  great  force  and  ability 
the  arguments  against  the  decision  which  was  finally  arrived 
at  by  the  court.  It  was  after  a  full  discussion  of  the  ques- 
tions involved  and  with  the  knowledge  of  the  views  enter- 
tained by  the  minority,  as  expressed  in  the  dissenting  opinion, 
that  the  majority  of  the  court  came  to  the  conclusion  it  did. 
Soon  after  the  decision  a  petition  for  a  rehearing  of  the  case 
was  made,  supported  by  a  printed  argument  in  its  favor,  and 
pressed  with  an  earnestness  and  vigor  and  at  a  length  which 
were  certainly  commensurate  with  the  importance  of  the 
case.  This  court,  with  care  and  deliberation  and  also  with  a 
full  appreciation  of  their  importance,  again  considered  the 
questions  involved  in  its  former  decision.  A  majority  of  the 
court  once  more  arrived  at  the  conclusion  it  had  first  an- 
nounced, and  accordingly  it  denied  the  application.  And 
now  for  the  third  time  the  same  arguments  are  employed, 
and  the  court  is  again  asked  to  recant  its  former  opinion, 
and  to  decide  the  same  question  in  direct  opposition  to  the 
conclusion  arrived  at  in  the  Trans-Missouri  case.  The 
learned  counsel  while  making  the  application  frankly  confess 
that  the  argument  in  opposition  to  the  decision  in  the  case 
above  named  has  been  so  fully,  so  clearly,  and  so  forcibly 
presented  in  the  dissenting  opinion  of  Mr.  Justice  White 
[in  the  Freight  case]  that  it  is  hardly  possible  to  add  to  it, 
nor  is  it  necessary  to  repeat  it.  The  fact  that  there  was  so 
close  a  division  of  opinion  in  this  court  when  the  matter  was 
first  under  advisement,  together  with  the  different  views 
taken  by  some  of  the  judges  of  the  lower  courts,  led  us  to 
the  most  careful  and  scrutinizing  examination  of  the  argu- 
ments advanced  by  both  sides,  and  it  was  after  such  an  ex- 
amination that  the  majority  of  the  court  came  to  the  conclu- 
sion it  did.  It  is  not  now  alleged  that  the  court  on  the  former 
occasion  overlooked  any  argument  for  the  respondents  or 
misapplied  any  controlling  authority.  It  is  simply  insisted 
that  the  court,  notwithstanding  the  arguments  for  an  oppo- 

215 


APPENDIX  B 

site  view,  arrived  at  an  erroneous  result  which,  for  reasons 
already  stated,  ought  to  be  reconsidered  and  reversed.  As 
we  have  twice  already  deliberately  and  earnestly  considered 
the  same  arguments  which  are  now  for  a  third  time  pressed 
upon  our  attention,  it  could  hardly  be  expected  that  our 
opinion  should  now  change  from  that  already  expressed. 

These  utterances,  taken  in  connection  with  what  was 
previously  said  in  the  Trans- Missouri  Freight  case,  show 
so  clearly  and  affirmatively  as  to  admit  of  no  doubt 
that  this  court  many  years  ago,  upon  the  fullest  con- 
sideration, interpreted  the  antitrust  act  as  prohibiting 
and  making  illegal  not  only  every  contract  or  combina- 
tion, in  whatever  form,  which  was  in  restraint  of  inter- 
state commerce,  without  regard  to  its  reasonableness 
or  unreasonableness,  but  all  monopolies  or  attempt  to 
monopolize  "any  part"  of  such  trade  or  commerce. 

In  the  opinion  delivered  on  behalf  of  the  minority 
in  the  Northern  Securities  case  (193  U.  S.)  our  present 
Chief  Justice  referred  to  the  contentions  made  by 
the  defendants  in  the  Freight  Association  case,  namely, 
one  of  which  was  that  the  agreement  there  involved 
did  not  unreasonably  restrain  interstate  commerce, 
and  said: 

Both  these  contentions  were  decided  against  the  associa- 
tion, the  court  holding  that  the  antitrust  act  did  embrace 
interstate  carriage  by  railroad  corporations,  and  as  that  act 
prohibited  any  contract  in  restraint  of  interstate  commerce, 
it  hence  embraced  all  contracts  of  that  character,  whether 
they  were  reasonable  or  unreasonable. 

One  of  the  justices  who  dissented  in  the  Northern 
Securities  case  in  a  separate  opinion,  concurred  in  by 
the  minority,  thus  referred  to  the  freight  and  joint 
traffic  cases: 

216 


OPINION   OF   JUSTICE   HARLAN 

For  it  cannot  be  too  carefully  remembered  that  that 
clause  applies  to  "every"  contract  of  the  forbidden  kind— 
a  consideration  which  was  the  turning  point  of  the  Trans- 
Missouri  Freight  Association  case.  .  .  .  Size  has  noth- 
ing to  do  with  the  matter.  A  monopoly  of  "any  part"  of 
commerce  among  the  states  is  unlawful. 

After  what  has  been  adjudged,  upon  full  considera- 
tion, as  to  the  meaning  and  scope  of  the  antitrust  act, 
and  in  view  of  the  usages  of  this  court  when  attorneys 
for  litigants  have  attempted  to  reopen  questions  that 
have  been  deliberately  decided,  I  confess  to  no  little 
surprise  as  to  what  has  occurred  in  the  present  case. 
The  court  says  that  the  previous  cases,  above  cited, 
"cannot  by  any  possible  conception  be  treated  as 
authoritative  without  the  certitude  that  reason  was 
resorted  to  for  the  purpose  of  deciding  them. ' '  And  its 
opinion  is  full  of  intimations  that  this  court  proceeded 
in  those  cases,  so  far  as  the  present  question  is  con- 
cerned, without  being  guided  by  the  "rule  of  reason" 
or  "the  light  of  reason."  It  is  more  than  once  in- 
timated, if  not  suggested,  that  if  the  antitrust  act  is  to 
be  construed  as  prohibiting  every  contract  or  combina- 
tion, of  whatever  nature,  which  is  in  fact  in  restraint 
of  commerce,  regardless  of  the  reasonableness  or  un- 
reasonableness of  such  restraint,  that  fact  would  show 
that  the  court  had  not  proceeded,  in  its  decision,  ac- 
cording to  "the  light  of  reason,"  but  had  disregarded 
the  "rule  of  reason."  If  the  court,  in  those  cases, 
was  wrong  in  its  construction  of  the  act,  it  is  certain 
that  it  fully  apprehended  the  views  advanced  by  learned 
counsel  in  previous  cases  and  pronounced  them  to  be 
untenable.  The  published  reports  place  this  beyond  all 
question.  The  opinion  of  the  court  was  delivered  by 
a  justice  of  wide  experience  as  a  judicial  officer,  and 
the  court  had  before  it  the  Attorney-General  of  the 

217 


APPENDIX   B 

United  States  and  lawyers  who  were  recognized  on  all 
sides  as  great  leaders  in  their  profession.  The  same 
eminent  jurist  who  delivered  the  opinion  in  the  Trans- 
Missouri  case  delivered  the  opinion  in  the  Joint  Traffic 
case,  while  the  association  in  the  latter  case  was  repre- 
sented by  lawyers  whose  ability  was  universally  recog- 
nized. Is  it  to  be  supposed  that  any  point  escaped 
notice  in  those  cases  when  we  think  of  the  sagacity  of 
the  justice  who  expressed  the  views  of  the  court  or  of 
the  ability  of  the  profound,  astute  lawyers,  who  sought 
such  an  interpretation  of  the  act  as  would  compel  the 
court  to  insert  words  in  the  statute  which  Congress  had 
not  put  there,  and  the  insertion  of  which  words  would 
amount  to  "judicial  legislation"?  Now,  this  court  is 
asked  to  do  that  which  it  has  distinctly  declared  it  could 
not  and  would  not  do,  and  has  now  done  what  it  then 
said  it  could  not  constitutionally  do.  It  has  by  mere 
interpretation  modified  the  act  of  Congress  and  deprived 
it  of  practical  value  as  a  defensive  measure  against  the 
evils  to  be  remedied.  On  reading  the  opinion  just 
delivered  the  first  inquiry  will  be  that  as  the  court  is 
unanimous  in  holding  that  the  particular  things  done 
by  the  Standard  Oil  Co.  and  its  subsidiary  companies 
in  this  case  were  illegal  under  the  antitrust  act, 
whether  those  things  were  in  reasonable  or  unreason- 
able restraint  of  interstate  commerce,  why  was  it 
necessary  to  make  an  elaborate  argument,  as  is  done  in 
the  opinion,  to  show  that,  according  to  the  "rule  of 
reason, ' '  the  act  as  passed  by  Congress  should  be  inter- 
preted as  if  it  contained  the  word  "unreasonable"  or 
the  word  "undue"?  The  only  answer  which  in  frank- 
ness can  be  given  to  this  question  is  that  the  court  in- 
tends to  decide  that  its  deliberate  judgment  fifteen  years 
ago,  to  the  effect  that  the  act  permitted  no  restraint 
whatever  of  interstate  commerce,  whether  reasonable 

218 


OPINION  OF  JUSTICE  HARLAN 

or  unreasonable,  was  not  in  accordance  with  the  "rule 
of  reason."  In  effect  the  court  says  that  it  will  now 
for  the  first  time  bring  the  discussion  under  the  "light 
of  reason"  and  apply  the  "rule  of  reason"  to  the  ques- 
tions to  be  decided.  I  have  the  authority  of  this  court 
for  saying  that  such  a  course  of  proceeding  on  its  part 
would  be  "judicial  legislation." 

Still  more,  what  is  now  done  involves  a  serious  de- 
parture from  the  settled  usages  of  this  court.  Counsel 
have  not  ordinarily  been  allowed  to  discuss  questions 
already  settled  by  previous  decisions.  More  than  once 
at  the  present  term  that  rule  has  been  applied.  In 
St.  Louis,  I.  M.  &  S.  Ry.  Co.  v.  Taylor  (210  U.  S.,  281) 
the  court  had  occasion  to  determine  the  meaning  and 
scope  of  the  original  safety  appliance  act  of  Congress 
passed  for  the  protection  of  railroad  employees  and 
passengers  on  interstate  trains.  (27  Stat.,  531.)  A 
particular  construction  of  that  act  was  insisted  upon  by 
the  interstate  carrier  which  was  sued  under  the  safety- 
appliance  act;  and  the  contention  was  that  a  different 
construction  than  the  one  insisted  upon  by  the  carrier 
would  be  a  harsh  one.  After  quoting  the  words  of  the 
act,  Mr.  Justice  Moody  said  "for  the  court: 

There  is  no  escape  from  the  meaning  of  these  words.  Ex- 
planation cannot  clarify  them,  and  ought  not  to  be  employed 
to  confuse  them  or  lessen  their  significance.  The  obvious 
purpose  of  the  legislature  was  to  supplant  the  qualified  duty 
of  the  common  law  with  an  absolute  duty  deemed  by  it  more 
just.  If  the  railroad  does,  in  point  of  fact,  use  cars  which 
do  not  comply  with  the  standard,  it  violates  the  plain  pro- 
hibitions of  the  law,  and  there  arises  from  that  violation  the 
liability  to  make  compensation  to  one  who  is  injured  by  it. 
It  is  urged  that  this  is  a  harsh  construction.  To  this  we  re- 
ply that,  if  it  be  the  true  construction,  its  harshness  is  no 
concern  of  the  courts.  They  have  no  responsibility  for  the 
justice  or  wisdom  of  legislation  and  no  duty  except  to  enforce 

219 


APPENDIX   B 

the  law  as  it  is  written,  unless  it  is  clearly  beyond  the  con- 
stitutional power  of  the  lawmaking  body.  .  .  .  It  is  quite 
conceivable  that  Congress,  contemplating  the  inevitable 
hardship  of  such  injuries,  and  hoping  to  diminish  the  eco- 
nomic loss  to  the  community  resulting  from  them,  should 
deem  it  wise  to  impose  their  burdens  upon  those  who  could 
measurably  control  their  causes,  instead  of  upon  those  who 
are  in  the  main  helpless  in  that  regard.  Such  a  policy  would 
be  intelligible,  and,  to  say  the  least,  not  so  unreasonable  as 
to  require  us  to  doubt  that  it  was  intended  and  to  seek  some 
unnatural  interpretation  of  common  words.  We  see  no  error 
in  this  part  of  the  case. 

And  at  the  present  term  of  this  court  we  were  asked, 
in  a  case  arising  under  the  safety-appliance  act,  to  re- 
consider the  question  decided  in  the  Taylor  case.  We 
declined  to  do  so,  saying,  in  an  opinion  just  now  handed 
down: 

In  view  of  these  facts,  we  are  unwilling  to  regard  the 
question  as  to  the  meaning  and  scope  of  the  safety-appliance 
act,  so  far  as  it  relates  to  automatic  couplers  on  trains 
moving  interstate  traffic,  as  open  to  further  discussion  here. 
If  the  court  was  wrong  in  the  Taylor  case  the  way  is  open 
for  such  an  amendment  of  the  statute  as  Congress  may,  in  its 
discretion,  deem  proper.  This  court  ought  not  now  disturb 
what  has  been  so  widely  accepted  and  acted  upon  by  the 
courts  as  having  been  decided  in  that  case.  A  contrary 
course  would  cause  infinite  uncertainty,  if  not  mischief,  in 
the  administration  of  the  law  in  the  Federal  courts.  To 
avoid  misapprehension,  it  is  appropriate  to  say  that  we  are 
not  to  be  understood  as  questioning  the  soundness  of  the  in- 
terpretation heretofore  placed  by  this  court  upon  the  safety- 
appliance  act.  We  only  mean  to  say  that  until  Congress,  by 
an  amendment  of  the  statute,  changes  the  rule  announced  in 
the  Taylor  case,  this  court  will  adhere  to  and  apply  that 
rule.  (C.  B.  &  Q.  Ry.  Co.  v.  United  States,  220  U.  S.) 

When  counsel  in  the  present  case  insisted  upon  a 
reversal  of  the  former  rulings  of  this  court,  and  asked 
such  an  interpretation  of  the  antitrust  act  as  would 

220 


OPINION   OF   JUSTICE   HARLAN 

allow  reasonable  restraints  of  interstate  commerce, 
this  court,  in  deference  to  established  practice,  should, 
I  submit,  have  said  to  them: 

That  question,  according  to  our  practice,  is  not  open  for 
further  discussion  here.  This  court  long  ago  deliberately 
held  (1)  that  the  act,  interpreting  its  words  in  their  ordinary 
acceptation,  prohibits  all  restraints  of  interstate  commerce 
by  combinations  in  whatever  form,  and  whether  reasonable 
or  unreasonable  ;  (2)  the  question  relates  to  matters  of  public 
policy  in  reference  to  commerce  among  the  states  and  with 
foreign  nations,  and  Congress  alone  can  deal  with  the  sub- 
ject ;  (3)  this  court  would  encroach  upon  the  authority  of 
Congress  if,  under  the  guise  of  construction,  it  should  assume 
to  determine  a  matter  of  public  policy  ;  (4)  the  parties  must 
go  to  Congress  and  obtain  an  amendment  of  the  antitrust  act 
if  they  think  this  court  was  wrong  in  its  former  decisions ; 
and  (5)  this  court  cannot  and  will  not  judicially  legislate, 
since  its  function  is  to  declare  the  law,  while  it  belongs  to 
the  legislative  department  to  make  the  law.  Such  a  course, 
I  am  sure,  would  not  have  offended  the  "rule  of  reason." 

But  my  brethren,  in  their  wisdom,  have  deemed  it 
best  to  pursue  a  different  course.  They  have  now  said 
to  those  who  condemn  our  former  decisions  and  who 
object  to  all  legislative  prohibitions  of  contracts,  com- 
binations, and  trusts  in  restraint  of  interstate  com- 
merce, "You  may  now  restrain  such  commerce,  pro- 
vided you  are  reasonable  about  it;  only  take  care  that 
the  restraint  is  not  undue."  The  disposition  of  the 
case  under  consideration,  according  to  the  views  of  the 
defendants,  will,  it  is  claimed,  quiet  and  give  rest  to 
"the  business  of  the  country."  On  the  contrary,  I 
have  a  strong  conviction  that  it  will  throw  the  business 
of  the  country  into  confusion  and  invite  widely  ex- 
tended and  harassing  litigation,  the  injurious  effects 
of  which  will  be  felt  for  many  years  to  come.  When 
Congress  prohibited  every  contract,  combination,  or 

221 


APPENDIX   B 

monopoly  in  restraint  of  commerce,  it  prescribed  a 
simple,  definite  rule  that  all  could  understand,  and 
which  could  be  easily  applied  by  every  one  wishing  to 
obey  the  law  and  not  to  conduct  their  business  in  vio- 
lation of  law.  But  now,  it  is  to  be  feared,  we  are  to 
have,  in  cases  without  number,  the  constantly  recur- 
ring inquiry — difficult  to  solve  by  proof — whether  the 
particular  contract,  combination,  or  trust  involved  in 
each  case  is  or  is  not  an  "unreasonable"  or  "undue" 
restraint  of  trade.  Congress,  in  effect,  said  that  there 
should  be  no  restraint  of  trade,  in  any  form,  and  this 
court  solemnly  adjudged  many  years  ago  that  Congress 
meant  what  it  thus  said  in  clear  and  explicit  words,  and 
that  it  could  not  add  to  the  words  of  the  act.  But 
those  who  condemn  the  action  of  Congress  are  now,  in 
effect,  informed  that  the  courts  will  allow  such  re- 
straints of  interstate  commerce  as  are  shown  not  to  be 
unreasonable  or  undue. 

It  remains  for  me  to  refer  more  fully  than  I  have 
heretofore  done,  to  another,  and,  in  my  judgment — if 
we  look  to  the  future — the  most  important  aspect  of 
this  case.  That  aspect  concerns  the  usurpation  by  the 
judicial  branch  of  the  Government  of  the  functions  of 
the  legislative  department.  The  illustrious  men  who 
laid  the  foundations  of  our  institutions  deemed  no  part 
of  the  National  Constitution  of  more  consequence  or 
more  essential  to  the  permanency  of  our  form  of  gov- 
ernment than  the  provisions  under  which  were  distrib- 
uted the  powers  of  government  among  three  separate, 
equal,  and  co-ordinate  departments — legislative,  execu- 
tive, and  judicial.  This  was  at  that  time  a  new  fea- 
ture of  governmental  regulation  among  the  nations  of 
the  earth,  and,  it  is  deemed  by  the  people  of  every  sec- 
tion of  our  own  country  as  most  vital  in  the  workings 
of  a  representative  Republic  whose  Constitution  was 

222 


OPINION   OF  JUSTICE   HARLAN 

ordained  and  established  in  order  to  accomplish  the 
objects  stated  in  its  preamble  by  the  means,  but  only 
by  the  means,  provided  either  expressly  or  by  necessary 
implication,  by  the  instrument  itself.  No  department 
of  that  Government  can  constitutionally  exercise  the 
powers  committed  strictly  to  another  and  separate 
department. 

I  said  at  the  outset  that  the  action  of  the  court  in 
this  case  might  well  alarm  thoughtful  men  who  revered 
the  Constitution.  I  meant  by  this  that  many  things 
are  intimated  and  said  in  the  court's  opinion  which 
will  not  be  regarded  otherwise  than  as  sanctioning  an 
invasion  by  the  judiciary  of  the  constitutional  domain 
of  Congress — an  attempt  by  interpretation  to  soften  or 
modify  what  some  regard  as  a  harsh  public  policy. 
This  court,  let  me  repeat,  solemnly  adjudged  many 
years  ago  that  it  could  not,  except  by  '  'judicial  legis- 
lation," read  words  into  the  antitrust  act  not  put  there 
by  Congress,  and  which,  being  inserted,  give  it  a  mean- 
ing which  the  words  of  the  act,  as  passed,  if  properly 
interpreted,  would  not  justify.  The  court  has  de- 
cided that  it  could  not  thus  change  a  public  policy 
formulated  and  declared  by  Congress;  that  Congress 
has  paramount  authority  to  regulate  interstate  com- 
merce, and  that  it  alone  can  change  a  policy  once  in- 
augurated by  legislation.  The  courts  have  nothing  to 
do  with  the  wisdom  or  policy  of  an  act  of  Congress. 
Their  duty  is  to  ascertain  the  will  of  Congress,  and  if 
the  statute  embodying  the  expression  of  that  will  is 
constitutional,  the  courts  must  respect  it.  They  have 
no  function  to  declare  a  public  policy,  nor  to  amend 
legislative  enactments.  "What  is  termed  the  policy  of 
the  Government  with  reference  to  any  particular  legis- 
lation," as  this  court  has  said,  "is  generally  a  very 
uncertain  thing,  upon  which  all  sorts  of  opinions,  each 

223 


APPENDIX   B 

variant  from  the  other,  may  be  formed  by  different 
persons.  It  is  a  ground  much  too  unstable  upon  which 
to  rest  the  judgment  of  the  court  in  the  interpretation 
of  statutes."  (Hadden  v.  Collector,  5  Wall.,  107). 
Nevertheless,  if  I  do  not  misapprehend  its  opinion,  the 
court  has  now  read  into  the  act  of  Congress  words  which 
are  not  to  be  found  there,  and  has  thereby  done  that 
which  it  adjudged  in  1896  and  1898  could  not  be  done 
without  violating  the  Constitution,  namely,  by  inter- 
pretation of  a  statute  changed  a  public  policy  declared 
by  the  legislative  department. 

For  the  reasons  stated,  while  concurring  in  the  gen- 
eral affirmance  of  the  decree  of  the  circuit  court,  I  dis- 
sent from  that  part  of  the  judgment  of  this  court 
which  directs  the  modification  of  the  decree  of  the 
circuit  court,  as  well  as  from  those  parts  of  the  opinion 
which,  in  effect,  assert  authority,  in  this  court,  to 
insert  words  in  the  antitrust  act  which  Congress  did 
not  put  there,  and  which,  being  inserted,  Congress  is 
made  to  declare,  as  part  of  the  public  policy  of  the 
country,  what  it  has  not  chosen  to  declare. 


APPENDIX   C 


THE   SHERMAN   ANTITRUST  ACT 

An  act  to  protect  trade  and  commerce  against  unlawful 
restraints  and  monopolies. 

Be  it  enacted  by  the  Senate  and  House  of  Represen- 
tatives of  the  United  States  of  America  in  Congress 
assembled, 

SEC.  1.  Every  contract,  combination  in  the  form  of 
trust  or  otherwise,  or  conspiracy,  in  restraint  of  trade 
or  commerce  among  the  several  states,  or  with  foreign 
nations,  is  hereby  declared  to  be  illegal.  Every  person 
who  shall  make  any  such  contract  or  engage  in  any 
such  combination  or  conspiracy,  shall  be  deemed  guilty 
of  a  misdemeanor,  and,  on  conviction  thereof,  shall  be 
punished  by  fine  not  exceeding  five  thousand  dollars, 
or  by  imprisonment  not  exceeding  one  year,  or  by  both 
said  punishments,  in  the  discretion  of  the  court. 

SEC.  2.  Every  person  who  shall  monopolize,  or  at- 
tempt to  monopolize,  or  combine  or  conspire  with  any 
other  person  or  persons,  to  monopolize  any  part  of  the 
trade  or  commerce  among  the  several  states,  or  with 
foreign  nations,  shall  be  deemed  guilty  of  a  misde- 
meanor, and,  on  conviction  thereof,  shall  be  punished 
by  fine  not  exceeding  five  thousand  dollars,  or  by  im- 
prisonment not  exceeding  one  year,  or  by  both  said 
punishments,  in  the  discretion  of  the  court. 

16  225 


APPENDIX   C 

SEC.  3.  Every  contract,  combination  in  form  of  trust 
or  otherwise,  or  conspiracy,  in  restraint  of  trade  or 
commerce  in  any  Territory  of  the  United  States  or  of 
the  District  of  Columbia,  or  in  restraint  of  trade  or 
commerce  between  such  Territory  and  another,  or  be- 
tween any  such  Territory  or  Territories  and  any  State 
or  States  or  the  District  of  Columbia,  or  with  foreign 
nations,  or  between  the  District  of  Columbia,  and  any 
State  or  States  or  foreign  nations,  is  hereby  declared 
illegal.  Every  person  who  shall  make  any  such  contract 
or  engage  in  any  such  combination  or  conspiracy, 
shall  be  deemed  guilty  of  a  misdemeanor,  and,  on 
conviction  thereof,  shall  be  punished  by  fine  not  exceed- 
ing five  thousand  dollars,  or  by  imprisonment  not  ex- 
ceeding one  year,  or  by  both  said  punishments,  in  the 
discretion  of  the  court. 

SEC.  4.  The  several  circuit  courts  of  the  United 
States  are  hereby  invested  with  jurisdiction  to  prevent 
and  restrain  violations  of  this  act;  and  it  shall  be  the 
duty  of  the  several  district  attorneys  of  the  United 
States,  in  their  respective  districts,  under  the  direction 
of  the  Attorney-General,  to  institute  proceedings  in 
equity  to  prevent  and  restrain  such  violations.  Such 
proceedings  may  be  by  way  of  petitions  setting  forth 
the  case  and  praying  that  such  violation  shall  be  en- 
joined or  otherwise  prohibited.  When  the  parties 
complained  of  shall  have  been  duly  notified  of  such 
petition  the  court  shall  proceed,  as  soon  as  may  be,  to 
the  hearing  and  determination  of  the  case;  and  pending 
such  petition  and  before  final  decree,  the  court  may  at 
any  time  make  such  temporary  restraining  order  or 
prohibition  as  shall  be  deemed  just  in  the  premises. 

SEC.  5.  Whenever  it  shall  appear  to  the  court  before 
which  any  proceeding  under  section  four  of  this  act 
may  be  pending,  that  the  ends  of  justice  require  that 

226 


SHERMAN   ANTITRUST  ACT 

other  parties  should  be  brought  before  the  court,  the 
court  may  cause  them  to  be  summoned,  whether  they 
reside  in  the  district  in  which  court  is  held  or  not;  and 
subpoenas  to  that  end  may  be  served  in  any  district  by 
the  marshal  thereof. 

SEC.  6.  Any  property  owned  under  any  contract  or 
by  any  combination,  or  pursuant  to  any  conspiracy  (and 
being  the  subject  thereof)  mentioned  in  section  one  of 
this  act,  and  being  in  the  course  of  transportation 
from  one  state  to  another,  or  to  a  foreign  country, 
shall  be  forfeited  to  the  United  States,  and  may  be 
seized  and  condemned  by  like  proceedings  as  those  pro- 
vided by  law  for  the  forfeiture,  seizure,  and  condem- 
nation of  property  imported  into  the  United  States 
contrary  to  law. 

SEC.  7.  Any  person  who  shall  be  injured  in  his  busi- 
ness or  property  by  any  other  person  or  corporation  by 
reason  of  anything  forbidden  or  declared  to  be  unlawful 
by  this  act,  may  sue  therefor  in  any  circuit  court  of 
the  United  States  in  the  district  in  which  the  defendant 
resides  or  is  found,  without  respect  to  the  amount  in 
controversy,  and  shall  recover  threefold  the  damages 
by  him  sustained,  and  the  costs  of  suit,  including  a 
reasonable  attorney's  fee. 

SEC.  8.  That  the  word  "person,"  or  "persons," 
wherever  used  in  this  act  shall  be  deemed  to  include 
corporations  and  associations  existing  under  or  author- 
ized by  the  laws  of  either  the  United  States,  the  laws 
of  any  of  the  territories,  the  laws  of  any  state,  or  the 
laws  of  any  foreign  country. 

Approved,  July  2,  1890. 


APPENDIX  D 


THE    ALDRICH    PLAN   FOR  MONETARY 
LEGISLATION 

Origin  and  Status 

The  so-called  Aldrich  Plan  submitted  to  the  National 
Monetary  Commission  on  the  16th  of  January,  1911, 
has  awakened  more  extended  comment  than  any  other 
proposition  relating  to  our  banking  system  in  recent 
years.  Thus  far  this  plan  has  not  been  approved  by 
the  Monetary  Commission,  nor  has  any  bill  been  in- 
troduced in  Congress  to  carry  out  its  provisions. 

Organization  and  Capital 

The  plan  provides  for  the  organization  under  Fed- 
eral Charter,  with  its  head  office  at  Washington,  of  a 
banking  institution  to  be  known  as  The  Reserve  Asso- 
ciation of  America,  to  have  an  authorized  capital  of 
$300,000,000,  of  which  $150,000,000  shall  be  paid  in, 
the  balance  remaining  subject  to  call.  This  capital 
stock  must  be  owned  exclusively  by  national  banks, 
each  of  which  may  subscribe  for  an  amount  equal  to 
20  per  cent,  of  its  own  capital. 

Relation  to  the  Government 

It  is  intended  that  the  proposed  institution  shall  be 
the  fiscal  agent  of  the  United  States  Government,  shall 

228 


THE  ALDRICH  PLAN 

receive  on  deposit  moneys  now  lodged  in  the  Treasury 
of  the  United  States  and  in  the  Sub-Treasuries,  and 
shall  make  disbursements  for  the  government  to  all  its 
creditors. 

Earnings  and  Dividends 

The  net  earnings  of  the  Association  are  to  be  applied 
as  follows:  (1)  A  4  per  cent,  dividend  shall  be  paid 
to  the  stockholders.  (2)  Earnings  above  that  amount 
shall  be  divided,  one-half  to  a  surplus  fund  until  that 
surplus  shall  amount  to  20  per  cent,  of  the  paid-in 
capital  stock,  one-fourth  to  the  Government  of  the 
United  States,  and  the  remaining  one-fourth  to  the 
stockholders  until  their  dividend  shall  reach  5  per 
cent.  (3)  After  that  rate  is  earned  in  the  manner 
stated,  and  a  20  per  cent,  reserve  surplus  has  been 
created,  all  excess  earnings  shall  go  to  the  govern- 
ment. 

Local  Associations  and  Divisions 

Each  subscribing  bank  must  be  a  member  of  an 
Association  of  National  Banks  not  less  than  ten  in 
number,  and  having  a  combined  capital  and  surplus 
of  not  less  than  $5,000,000.  These  local  associations 
are  to  be  grouped  into  fifteen  divisions. 

Directors  of  Local  Associations 

The  local  associations  shall  elect  Boards  of  Directors 
in  the  following  manner:  three-fifths  of  the  number  of 
directors  shall  be  elected  by  representatives  of  the 
banks  that  are  members  of  the  local  associations,  each 
bank  having  one  vote  without  reference  to  its  size. 
The  remaining  two-fifths  shall  be  elected  by  the  same 
representatives,  but  each  shall  be  entitled  to  as  many 

229 


APPENDIX   D 

votes  as  the  bank  which  he  represents  holds  shares  in 
the  Association. 

Directors  of  Branches 

The  Board  of  Directors  of  each  of  the  fifteen  branches- 
of  the  Reserve  Association  shall  be  composed  of:  (1) 
A  group  of  directors  equal  in  number  to  the  number 
of  local  associations  composing  the  district,  elected  by 
the  directors  of  the  local  associations,  each  director 
having  one  vote.  (2)  A  group  of  directors  equal  to 
two-thirds  of  the  foregoing  group  and  elected  by  stock 
representation.  (3)  A  group  of  directors  equal  in  num- 
ber to  one-third  of  the  first  group,  representing  the 
industrial,  commercial,  agricultural,  and  other  inter- 
ests of  the  district  and  elected  by  the  votes  of  the  first 
two  groups,  each  director  having  one  vote. 

Directors  of  the  Reserve  Association 

The  Board  of  the  Reserve  Association  shall  consist 
of  forty-five  directors,  chosen 'as  follows:  (1)  six-ex- 
officio  members,  namely,  the  Governor  of  the  Reserve 
Association,  who  shall  be  Chairman  of  the  Board;  two 
Deputy  Governors  of  the  Reserve  Association,  the  Sec- 
retary of  the  Treasury,  the  Secretary  of  Commerce  and 
Labor,  and  the  Comptroller  of  the  Currency.  (2)  Fifteen 
directors  to  be  elected,  one  by  the  Board  of  Directors, 
of  each  branch  of  the  Reserve  Association.  (3)  Twelve 
directors,  who  shall  be  elected  by  voting  representa- 
tives, one  representing  the  banks  embraced  in  each 
district,  each  voting  representative  to  cast  a  number 
of  votes  equal  to  the  number  of  shares  in  the  Reserve 
Association  held  by  all  the  banks  in  the  district  which 
he  represents.  (4)  The  board  thus  constituted  shall 
select  twelve  additional  members,  who  shall  fairly  rep- 

230 


THE  ALDRICH  PLAN 

resent  the  industrial,  commercial,  agricultural,  and 
other  interests  of  the  country,  and  who  shall  not  be 
officers  of  banks. 

The  Directors  of  the  Reserve  Association  shall  elect 
an  executive  committee  of  nine  members. 

Executive  Officers  of  the  Reserve  Association 

The  executive  officers  of  the  Reserve  Association, 
consisting  of  a  Governor  and  two  Deputy-Governors, 
are  to  be  selected  by  the  President  of  the  United 
States  from  a  list  submitted  by  the  Board  of  Direc- 
tors. Each  shall  have  a  seven  year  term  of  office  and 
shall  be  subject  to  removal  for  cause  by  the  President. 

Concentration  of  Power  Prevented 

The  distinctive  feature  in  the  manner  of  selecting 
directors  of  local  associations,  of  branches  and  of  the 
central  association  is  the  effort  to  prevent  concentra- 
tion of  power  in  large  banks.  A  similar  purpose  is 
revealed  in  providing  that  in  both  the  branch  associa- 
tions and  the  central  association  there  shall  be  direc- 
tors chosen  from  outside  who  are  not  bank  officials, 
but  associated  with  the  leading  interests  and  enter- 
prises of  the  country.  In  this  particular  the  provision 
for  the  control  of  the  association  and  all  its  subsidi- 
aries is  unique.  It  neither  follows  the  rule  in  vogue 
in  some  countries  of  vesting  the  absolute  power  of  se- 
lection in  political  officials,  nor  does  it,  on  the  other 
hand,  vest  entire  control  in  those  who  own  the  stock. 

Loans,  Investments  and  Rates  of  Interest 

The  National  Reserve  Association  may  make  three 
kinds  of  loans  to  banks  having  deposits  with  it. 
First,  it  may  discount  such  notes  and  bills  as  have 

231 


APPENDIX   D 

a  maturity  of  not  more  than  twenty-eight  days,  and  have 
been  made  at  least  thirty  days  prior  to  the  date  of 
rediscounting,  provided  that  this  paper  arises  from 
commercial  transactions  and  is  indorsed  by  any  bank 
having  a  deposit  with  it.  Such  paper  may  be  accepted 
by  the  central  institution  without  any  guaranty  by  the 
local  association.  The  second  class  of  investments 
consists  in  the  rediscounting  of  notes  or  bills  of  ex- 
change arising  out  of  commercial  transactions,  having 
more  than  twenty-eight  days,  but  not  more  than  four 
months  to  run;  in  this  case  a  paper  must  be  guaran- 
teed by  the  local  association.  A  third  form  of  dis- 
count which  is  evidently  intended  for  times  of  some 
difficulty  or  stress  is  provided  for  as  follows:  "When- 
ever, in  the  opinion  of  the  governor  of  the  National 
Reserve  Association,  the  public  interests  so  require, 
such  opinion  to  be  concurred  in  by  the  executive  com- 
mittee of  the  National  Reserve  Association  and  to  have 
the  definite  approval  of  the  Secretary  of  the  Treasury, 
the  National  Reserve  Association  may  discount  the 
direct  obligation  of  a  depositing  bank,  indorsed  by  its 
local  association,  provided  that  the  indorsement  of  the 
local  association  shall  be  fully  secured  by  the  pledge 
and  deposit  with  it  of  satisfactory  securities,  which 
shall  be  held  by  the  local  association  for  account  of 
the  National  Reserve  Association;  but  in  no  case  shall 
the  amount  loaned  by  the  National  Reserve  Associa- 
tion exceed  two-thirds  of  the  actual  value  of  the  secu- 
rities so  pledged."  In  this  third  case  the  amount 
may  be  loaned  irrespective  of  the  time  to  run,  if  the 
direct  obligation  of  the  deposit  bank  is  indorsed  by 
the  local  association  to  which  it  belongs  and  is  fully 
protected  by  satisfactory  securities.  The  following 
provision  in  the  Aldrich  plan  is  especially  important: 
"The  rate  of  discount  of  the  National  Reserve  Asso- 

232 


THE  ALDRICH  PLAN 

elation,  which  shall  be  uniform  throughout  the  United 
States,  shall  be  fixed  from  time  to  time  by  the  execu- 
tive committee  and  duly  published."  This  provision 
prevents  preference  to  the  stronger  banks  or  to  those 
where  money  is  more  abundant,  thereby  naturally  con- 
ferring a  more  immediate  benefit  upon  portions  of  the 
country  where  rates  of  interest  for  any  reason  are 
high.  The  point  most  in  its  favor  is  that  it  estab- 
lishes and  gives  a  stability  to  the  banking  business 
throughout  the  United  States.  It  would  tend  to  re- 
lieve the  pressure  of  smaller  and  weaker  banks  upon 
the  stronger. 

Purchases  may  be  made  to  a  limited  amount  from  a 
depositing  bank  of  acceptances  of  banks  or  houses  of 
unquestioned  financial  responsibility.  Such  accept- 
ances must  arise  from  commercial  transactions  and 
have  a  maturity  not  exceeding  ninety  days,  and  must 
be  of  a  character  generally  known  in  the  market  as 
prime  bills.  They  must  bear  the  indorsement  of  the 
depositing  bank  selling  the  same,  which  indorsement 
must  be  other  than  that  of  the  acceptor. 

May  Deal  in  Gold  and  Foreign  Bills  of  Exchange 

The  association  may  also  invest  in  United  States 
bonds  and  in  short  term  obligations — that  is,  obliga- 
tions having  not  more  than  one  year  to  run — of  the 
United  States,  or  of  any  State,  or  of  certain  foreign 
governments  to  be  named  in  the  act.  It  may  also 
have  power  at  home  and  abroad  to  deal  in  gold  coin 
or  bullion,  and  grant  loans  thereon,  and  in  checks  or 
bills  of  exchange  payable  in  England,  France,  or  Ger- 
many, and  in  such  other  countries  as  the  Board  of  the 
Reserve  Association  may  determine. 

The  association  shall  have  power  to  open  and  main- 

233 


APPENDIX   D 

tain  banking  accounts  in  foreign  countries  and  estab- 
lish agencies  abroad  for  the  purpose  of  purchasing  and 
selling  and  collecting  foreign  bills  of  exchange.  A  pro- 
posed amendment  to  the  national  banking  law  author- 
izes the  banks  to  accept  commercial  paper  drawn  on  them 
having  not  more  than  ninety  days  to  run,  if  properly 
secured  and  arising  out  of  commercial  transactions. 

Resources  of  the  Reserve  Association 

The  loanable  funds  of  the  central  reserve  association 
would  be  made  up  of  the  $150,000,000  paid  up  capital 
and  the  20  per  cent,  surplus  as  provided  in  the  pro- 
posed act.  To  this  should  be  added  the  deposits  of 
government  funds  and  deposits  received  from  banks 
which  hold  stock  in  the  association.  These  deposits 
from  banks  would  be  very  materially  increased  by  a 
permission  to  be  incorporated  in  the  proposed  plan 
which  would  allow  banking  institutions  to  make  de- 
posits with  the  Reserve  Association  from  their  re- 
quired reserves.  Under  existing  law  these  reserves 
must  be  retained  by  the  banks  in  their  vaults.  It  is  an 
essential  feature  of  the  plan  that  the  association,  un- 
like reserve  banks  under  the  present  arrangement,  shall 
not  pay  interest  on  reserves  or  other  money  deposited 
with  it.  To  all  these  resources  of  the  association  should 
be  added  the  notes  which  it  may  issue. 

Note  Issues 

National  banks  are  forbidden  to  Issue  further  notes 
and  whenever  any  portion  of  their  existing  circulation 
is  withdrawn,  the  right  to  reissue  it  is  permanently 
surrendered.  The  Reserve  Association  must  for  a 
period  of  one  year  offer  to  purchase  at  a  price  not 
less  than  par  and  accrued  interest  the  2  per  cent. 

234 


THE   ALDRICH    PLAN 

bonds  now  held  by  national  banks  and  deposited  to 
secure  their  circulating  notes.  These  bonds  are  to  be 
taken  over  by  the  Reserve  Association  with  the  exist- 
ing currency  privilege  attached  and  as  fast  as  notes 
secured  by  these  bonds  are  redeemed,  notes  to  an  equal 
amount  issued  by  the  Association  will  be  substituted, 
the  intention  being  to  retire  as  rapidly  as  possible  all 
bond  secured  circulation  and  to  substitute  therefor  the 
notes  of  the  Reserve  Association.  For  a  period  of  ten 
years  the  Association  agrees  to  hold  the  bonds  so  pur- 
chased, but  after  two  years,  with  the  approval  of  the 
Secretary  of  the  Treasury,  it  may  dispose  annually 
of  $50,000,000  of  the  bonds  held  by  it  to  secure  circu- 
lation. If  the  government  should  issue  bonds  at  a 
higher  rate  of  interest  than  2  per  cent.,  the  Reserve 
Association  shall  have  the  right  to  exchange  at  par  the 
government  bonds  which  it  may  have  acquired  from 
the  national  banks,  but  shall  pay  upon  its  notes  secured 
by  such  new  bonds  an  increased  rate  of  taxation  equal 
to  the  additional  interest  in  excess  of  2  per  cent.  The 
further  right  exists  to  issue  additional  notes  with  a 
graded  tax  beginning  at  3  per  cent,  on  the  first  $100,- 
000,000  and  reaching  6  per  cent,  for  all  amounts  above 
$300,000,000.  This  second  class  of  notes,  however, 
must  be  covered  to  the  extent  of  at  least  one-third  by 
gold  or  other  lawful  money  and  the  remaining  portion 
by  bonds  of  the  United  States  or  bankable  commercial 
paper.  The  notes  of  the  Reserve  Association  are  made 
legal  tender  except  for  obligations  of  the  government 
which  are  by  their  terms  specifically  payable  in  gold. 

State  Banks 

It  is  conceded  to  be  desirable  that  state  banks,  cap- 
italized savings  banks,  trust  companies,  and  mutual 

235 


APPENDIX   D 

savings  banks  should  become  members  of  the  Reserve 
Associations  and  subscribe  to  its  stock.  The  objec- 
tion to  their  membership  is  based  upon  the  lack  of 
uniform  and  adequate  regulations  governing  the 
amount  of  their  capital  and  reserve,  and  the  varying 
degrees  of  strictness  in  their  supervision  and  manage- 
ment. 

A  plan  has  been  suggested  under  which  any  of  these 
banks  may  become  a  member  provided  it  has  a  capital 
and  surplus  not  less  than  that  required  for  a  national 
bank  in  the  same  location,  and  maintains  against  its 
demand  deposits  a  reserve  of  like  character  in  the  same 
proportion  as  that  required  of  national  banks;  also 
that  each  institution  shall  agree  to  submit  to  such  ex- 
amination and  comply  with  such  requirements  as  may 
from  time  to  time  be  prescribed  by  the  National 
Reserve  Association. 

Objects  to  Be  Secured 

The  manifest  objects  to  be  secured  by  the  Reserve 
Association  are:  first,  a  concentration  of  the  reserves 
of  banks  and  their  utilization  for  the  support  of  the 
banking  institutions  of  the  country;  second,  a  safe 
and  efficient  currency  system  under  which  circulating 
notes  can  be  issued  in  such  quantities  and  at  such 
times  as  shall  be  demanded  by  the  requirements  of 
business. 

Comparison  with  Central  Banks  of  Europe 

The  proposed  reserve  association  differs  materially 
from  a  central  bank  in  that  its  capital  is  exclusively 
held  by  banks,  and  that  in  its  dealings  it  does  not 
enter  into  the  same  competition  with  them  that  an 
independent  institution  would.  The  plan  recognizes 

236 


THE   ALDRICH    PLAN 

the  advantages  of  a  restriction  of  the  note  issuing 
privilege  to  a  single  institution — a  method  which  has 
met  with  approval  in  most  other  countries.  In  this 
respect  as  well  as  in  its  proposed  function  as  the  fiscal 
agent  of  the  government  it  resembles  the  central  banks 
of  Europe. 


INDEX 


INDEX 


AGE,  Pre-machinery,  14. 

Alabama,  Supreme  Court  of, 
103. 

Alexander,  100. 

American  Sugar  Refining  Co., 
percentage  of  business 
controlled  by,  105. 
wins  Knight  case,  171. 

American  Tobacco  Co.,  disso- 
lution of,  155. 
methods  of,  158,  174. 
plan  of    reorganization  of, 
156. 

Aristotle,  theory  of,  as  to  the 
origin  of  the  state,  5. 

Asia  Minor,  colonies  in,  8. 

Assets  of  banks,  basis  for  note 
issues,  96. 

Association,  importance  of,  5, 

98. 
origin  of,  4. 

Associations,  early,  5,  16. 
price,  in  Germany,  37. 

Assyria,    activities   of    kings 
of,  7. 

Athens,  8. 

Autumn  drain  of  currency,  96. 


BABYLONIA,  activities  of  kings 
of,  7. 


Bank    of   Commerce,   capital 

and  deposits  of,  89. 
Bank  of  England,  branches  of, 

88. 

capital  and  deposits  of,  89. 
directors  of,  88. 
management  of,  88. 
note  issues  of,  87. 
Bank  of  France,  a  central  in- 
stitution, 31. 
branches  of,  88. 
capital  and  deposits  of,  89. 
directors,  88. 
Bank  of  Germany.  See  Reichs- 

bank. 

Bank  of  North  America,  73. 
Bank  of  the  United  States,  73. 
Banking  system  of  the  United 
States,  features  of,  82, 
90. 

history  of,  73. 
Beef   industry,    report   upon, 

26. 
Beef   Trust,    effect  of    tariff 

upon,  108. 

Bell  Telephone  Company,  147. 
Bentham,  Jeremy,  100. 
Berlin,  porcelain  manufactur- 
ers of,  8. 
Bland-Allison  Act,  84. 


17 


241 


INDEX 


Bonds,  to  secure  note  issues, 

81. 

Bradley,  Justice,  64. 
Bureau  of  Corporations,  plan 

of,     for    extension     of 

powers,  175. 
powers  conferred  upon,   by 

Federal      Incorporation 

Bill,  70,  140. 
report  of,  on  beef  industry, 

27. 
Bureau  of  Statistics,  estimate 

by,   of  total  wealth  of 

the  United  States,  99. 

CABOTS,  charter  of,  10. 
Caesar,  Augustus,  18. 

Julius,  18. 
Canals,  ancient,  7. 

Erie,  33. 

of  Pennsylvania  and  Ohio, 

33. 

Cape  of  Good  Hope,  16. 
Capital,  growth  of,  16. 

importance  of,  14,  15. 
Capitalization,  increase  of,  56. 

regulation  of,  55. 
Carlyle,  Thomas,  definition  of 

Society  by,  4. 

Carnegie  Steel  Company,  25. 
Cartel,  compared  with  a  trust, 
40. 

like  a  pool,  38. 

operation  of,  39. 
Catiline,  conspiracy  of,  18. 
Census     report,     quotes    A. 

Smith,  3. 

Charters.     See  Corporations. 
Chase,  Salmon  P.,  78. 


China,  stagnation  of,  4. 
Clark,  Champ,  113. 
Clark,     John     B.,    suggested 
regulations  of,  135-137. 
Clearing  House  Association  of 

New  York,  93. 
Cleveland,  regulation  of  street 

railways  in,  51. 
Clive,  Lord,  10. 
Clodius,   suppression    of  col- 
legia by,  18. 
Coke,  Sir  Edward,  definition 

of  corporation  by,  2. 
Collegia,  Roman,  17,  18. 
Colorado,   regulation  of  divi- 
dends in,  57. 

Combinations,  attitude  of  Su- 
preme Court  toward, 
172. 

causes  of,  25-28. 
checks   to   growth   of,   104, 

105. 

evils  of,  28,  29. 
extent  of,  22. 
in  England,  42,  43. 
in  France,  41,  42. 
in  Germany,  37,  38. 
influence  of,  115,  118. 
not    prominent   in   agricul- 
ture, banking,  etc.,  30, 
31. 

tendency  toward,  25. 
Commission.  See  Industrial 
Commission,  Interstate 
Commerce  Commission, 
and  National  Monetary 
Commission. 

Commissioner  of  Internal 
Revenue,  60. 


242 


INDEX 


Committee   on    Banking    and 

Currency,  76. 
Competition,    persistence    of, 

105,  106. 
railway,  34,  35. 
superseded  by  combination, 

20. 

Comptroller  of  the  Currency, 
reports  of  banks  to,  80. 
Conference  of  Governors,  rec- 
ommendations of,  149. 
Connecticut,     regulation     of 

dividends  in,  57. 
Conservation    of   natural   re- 
sources, 109,  110. 
Consumer,    influence  of  com- 
binations on,  118. 
Corporations,      ancient      and 

mediaaval,  3,  20. 
banking,  72. 
campaign  contributions  of, 

113. 

capitalization  of,  in  differ- 
ent states,  55,  56. 
charters  of,  57,  58,  142. 
competition  of  states  to  at- 
tract, 63. 
danger    of    corruption    by, 

113. 

definition  of,  1,  2. 
domination  of,  22,  112. 
favorable   attitude  toward, 

49,  109,  114. 
federal  control  of,  64. 
law  of  New  Jersey,  21. 
laws  of  England,  45. 
of  France,  46. 
of  Germany,  44,  45. 
of  United  States,  46. 


Corporations,  obstacles  to  re- 
gulation of,  49,  51. 
property  owned  by,  99. 
Roman,  18. 
separate  entity  of,  2. 
suggested  methods  of  deal- 
ing with,  124. 
tax  on,  60. 
tax  returns  of,  98. 
true  conception  of,  122,  123. 
See  also  Regulations. 
Counterfeiting,  prior  to  Civil 

War,  77. 

Crime  of  '73,  83. 
Crimea,  8. 

Criminal  code  of  France,  41. 
Cumberland  Road,  33. 
Currency  system,  of  England, 

85. 

of  United  States,  82-85. 
Currie's   Administrators    vs. 
Mutual    Assurance    So-, 
ciety,  122. 

DARTMOUTH  COLLEGE  CASE,  2. 
Day,   Justice,  opinion  of,   in 

Chesapeake    and     Ohio 

Fuel  case,  165. 
Defoe,  14. 
Delaware,  52. 
Demosthenes,  8. 
Diamond  Match  Co.  vs.  Roe- 

ber,  130. 
"Dictionary  of   Commerce," 

13. 

Diogenes,  100. 
Directors,  liabilities  of,  57. 

responsibilities  of,  2. 
Distribution,  economies  in,  27. 


243 


INDEX 


Dividends,  regulations  of,  57, 
141. 

Dresden,  porcelain  manufact- 
urers of,  8. 

EAST  INDIA  COMPANY,  organ- 
ized, 9. 
powers  of,  10. 

Elasticity,  lack  of,  in  Eng- 
land, 86. 

in  the  United  States,  85. 
England,  combinations  in,  42. 
corporation  laws  of,  45. 
franchises  of  public  service 

corporations  in,  50. 
railway  systems  of,  22. 
Erie  Canal,  33. 

FEDERAL  ASSISTANCE  TO  RAIL- 
WAYS, 33. 

Federal  banking  laws,  72. 
Federal    control    of    corpora- 
tions, three  plans  of,  64. 
Federal    government,    objec- 
tions to  note  issue  by,  95. 
power   of,    over    interstate 
and  foreign  commerce, 
63,  64,  171. 

Federal    incorporation,   argu- 
ments for,  151,  153,  174. 
bill  for,  69-71. 
objections  to,  153. 
of  railways,  67,  151. 
versus  licensing,  66. 
voluntary  plan  of,  151. 
Florida,  drainage  of  lands  in, 

65. 

regulation  of  dividends  in, 
57. 


Food  supply,   importance  of, 

7,  8. 

Fourteenth  Amendment,  102. 
Fox,  quoted  by  Gladstone,  36. 
France,  combinations  in,    41, 
42. 

corporation  laws  of,  46. 

criminal  code  of,  41,  42. 

railway  systems  of,  22. 

state  monopolies  of,  8. 

See  also  Bank  of  France. 
Franchises,  in  England,  50. 

limitation  of  powers  of,  142. 
Fraudulent    concerns,    profits 
of,  138,  139. 

GERMANY,  combinations  of,  37. 

publicity  in,  60. 

regulations  of   corporations 
in,  44,  45,  55,  140. 

See  also  Reichsbank. 
Gladstone,    on    railway   com- 
petition, 35,  36. 
Good  Oil  Company,  121. 
Government  ownership,  objec- 
tions to,  124-127. 
Great  Britain.     See  England. 
Greece,  associations  of,  16. 

colonies  of,  8. 

state  monopolies  of,  8. 
Greeley,  Horace,  77. 
Greenbacks,  amount  of,  83. 

inelasticity  of,  96. 

issue  of,  82. 
Guilds,  mediaeval,  19,  20. 

HALE,  Sir  Matthew,  102. 
Harlan,  Justice,  159,  161,  163, 
165,  166,  168. 


244 


INDEX 


Hastings,  Warren,  10. 
Hening  &  Munford's  Virginia 

Reports,  122. 
Holding  company,  appearance 

of,  21. 
effect  of,  upon  competition, 

119,  120. 

prevalence  of,  47. 
prohibited  by  administration 
measure,  70. 

IDAHO,  forests  of,  110. 
regulation  of  dividends  in, 
57. 

Illinois  Central  R.R.,  33. 

Illinois,  state  of,  33. 

Incorporation,  three  methods 

of,  52,  53. 

See  also  Federal  incorpora- 
tion. 

Independent  producer,  effect 
of  combination  upon, 
117,  118. 

India,  lack  of  progress  of,  4. 

Indiana,  banking  laws  of,  78. 

Industrial  Commission,  28,  35. 
recommendations     of,      for 
publicity,  61. 

Interest.  See  Rate  of  inter- 
est. 

Interstate  commerce,  power 
of  federal  government 
over,  63,  64,  151,  171. 

Interstate  Commerce  Act,  for- 
bids pools,  32,  36. 

Interstate  Commerce  Commis- 
sion, statement  by,  of 
number  of  railway  em- 
ployees, 125 


Investor,   influence    of    com- 
bination on,  116,  117. 
protection  of,  139,  140. 

Iowa,  regulation  of  stock  is- 
sue in,  56. 

Italy,  state  monopolies  of,  8. 

JEFFERSON,  Thomas,  64. 
Joint-stock  company,  absence 

of,  13,  14. 
growth  of,  15. 
Joint  Traffic  Association  case, 

163,  169. 
Judiciary  Committee,   report 

of,  162. 

KNIGHT  SUGAR  CASE,  over- 
ruled, 171. 

LACOMBE,  Judge,  opinion  of, 
in  Tobacco  case,  164. 

Laissez-faire  doctrine,  100, 
148. 

Lake  Shore  &  Michigan  South- 
ern R.R.,  34. 

Levant  Company,  9. 

London,  franchise  of  a  gas 
company  in,  50. 

Louis  XIV,  11. 

Louisiana,  banking  laws  of, 
78. 

MAILS,  fraudulent  use  of, 
138. 

Maine,  regulations  of  divi- 
dends in,  57. 

Mann-Elkins  law,  136. 

Massachusetts,  laws  of,  52. 
regulations  of  stock  issues 
in,  56. 


245 


INDEX 


McCulloch,  J.  R.,  views  of,  on 
growth    of     joint-stock 
company,  13. 
McKinley,   story  told    by,   of 

Horace  Greeley,  77. 
Mexico,  City  of,  15. 
Middle    Ages,    corporate    or- 
ganizations of,  20. 
monopolies  of,  28. 
Minnesota  Rate  case,  68. 
Mobile,   power  of  city  to  li- 
cense bankers,   upheld, 
103. 
Mogul  S.S.  Co.  vs.  McGregor, 

43. 

Monopoly,  control  of,  133. 
definition  of,  132. 
prevention  of,  132,  134. 
reasons  for  grants  of,   10, 

12. 

state,  8,  9. 
superseded  by   competition, 

16. 

Montana,  forests  of,  110. 
regulation  of    stock   issues 

in,  56. 

Munn  vs.  Illinois,  101. 
Munsterberg,  Professor,  41. 

NATIONAL  BANKING  ACT,  con- 
stitutionality of,  80. 

National      banking     system, 

adopted,  78. 

essential  provisions  of,  78. 
See  also  Note  issues. 

National   City   Bank,   capital 
and  deposits  of,  89. 

National    Monetary  Commis- 
sion, duties  of,  94. 


National  Tobacco  Works,  158. 
Netherlands,  state  monopolies 

of,  8. 

New   England,   currency  sys- 
tem of,  78. 
New  Hampshire,  purchase  of 

forest  reserves  in,  67. 
New  Jersey  corporation  law, 

21,  149. 
New  Orleans,  68. 
New  York,  early  bank  char- 
ters of,  73. 
laws  of,  52. 
safety    fund     system     of, 

75. 

New  York  Central  R.R.,  34. 
New    York,    Chicago    &    St. 

Louis  R.R.,  34. 
New  York   City,  street  rail- 
ways of,  141. 
New  York  Tribune,  52. 
New  Zealand  Company,  9. 
North,  Frank,  52. 
North  River  Sugar  Co.,  ab- 
surdity of  argument  for, 
2. 

dissolution  of,  128. 
Northern     Securities       case, 
checks  increase  of  com- 
binations, 21. 

Note  issues,  of  Bank  of  Eng- 
land, 85. 

of  Bank  of  France,  87. 
of  Imperial   Bank   of   Ger- 
many, 87. 

of  national  banks,  81,  83. 
prior  to  Civil  War,  74-77. 
Numa,  establishes    first   col- 
legia, 17. 


246 


INDEX 


OUTPUT,  limitations  of,  in  Ger- 
many, 38. 

Overcapitalization,  worst  evil 
of  combinations,  29. 

PARTNERSHIP,  between  state 
and  individuals,  9. 

Patent  laws,  suggested  revi- 
sion of,  147. 

Payne-Aldrich  Tariff  Bill,  pro- 
vision for  corporation 
tax,  60. 

Peckham,  Justice,  opinion  of, 
in  Trans-M  i  s  s  o  u  r  i 
Freight  case,  163,  164. 

Peel,  Sir  Robert,  66. 

Penal  statutes,  need  for  clear- 
ness in,  142,  143. 

Pennsylvania,  52,  65 
University  of,  155. 

Philip  and  Mary,  reign  of,  9. 

Political  groups,  bargaining 
of,  125. 

Political  institutions,  perma- 
nence of,  23. 

Population,  increase  of,  a  sign 
of  progress,  3,  4. 

Post  Office  Department,  state- 
ment by,  of  profits  of 
fraudulent  concerns,  139. 

Prices,  state  control  of,  104, 
144. 

Profits,  limitations  of,  145, 146. 

Promoter's  period,  character- 
istics of,  29. 

Publicity,  arguments  for  and 

against,  59,  137. 
for  capitalization,  140. 
for  stock  subscriptions,  137. 


Publicity,  in  Germany,  60. 

recommendations  of  indus- 
trial commission  for, 
161. 

regulations  for,  58. 

tendency  toward,  62. 

QUEBEC,   methods   of    incor- 
poration in,  52. 

RAILWAYS,   consolidation    of, 

22. 
federal  incorporation  of,  67, 

151. 

land  grants  to,  33. 
laws    regarding    incorpora- 
tion of,  53,  54. 
nature  of,  32. 
regulation  of,  32. 
Rate  of  interest,  control  of, 

90,  91. 

Rebates,  effect  of,  on  corpora- 
tions, 108. 
forbidden,  134. 
Regulation    of    corporations, 

advisability  of,  127. 
necessity  for,  140. 
opposition  to,  148. 
salutary    and     unsalutary, 

128,  132. 
Reichsbank,    appointment    of 

directors  of,  88. 
branches  of,  89. 
capital  and  deposits  of,  89. 
note  issues  of,  87. 
Reserves,  bank,  91,  92. 
interest  on  92,  93. 
Restraint  of  trade,   common- 
law  doctrine  of,  129. 


247 


INDEX 


Restraint  of  trade,  decision  in 
Roeber  case,  130. 

Riner,  Judge,  opinion  of,  168. 

Roane,  Judge  Spencer,  con- 
ception of  a  corporation, 
122. 

Roman  collegia,  origin  of,  17. 

Roman  conception  of  juristic 
person  19. 

Roman  law,  19. 

Rome,  purchases  of  grain  by, 
7. 

Rule  of  reason,  160,  167. 

Russia,  state  monopolies  of,  8. 

SAFETY  FUND,  inadequacy  of, 

96. 

system  of  New  York,  75. 
Sanborn,  Judge,  decisions  of, 

69,  169. 
Servia,   state   monopolies   of, 

8. 

Sevres,    porcelain    manufact- 
urers of,  8. 
Shephard  vs.  Northern  Pacific 

Ry.  Co.,  69. 

Sherman,  Senator,  78,  95. 
Sherman   Law,   chief  Justice 
White's     interpretation 
of,  160,  168. 
enforcement  of,  21. 
former  view  of,  163-165. 
inadequacy  of,  173. 
Justice   Harlan's    view  of, 

161,  163,  165,  168. 
proposal  to  amend,  162. 
provisions  of,  131,  132. 
Ship  Building  Trust,  collapse 
of,  29. 


Silver  dollar,  amount  of,  84. 
history  of,  83. 
inelasticity  of,  96. 
Silver  Purchase  Act,  84,  95. 
Smith,     Adam,     laissez-faire 

doctrine  of,  100. 
on  population,  3. 
views    of,     on     joint-stock 

companies,  13. 
Socialism,  arguments  against, 

111,  112. 
Society,     Carlyle's    definition 

of,  4. 

Solomon,  King,  7. 
Solon,  new    divisions    of    so- 
ciety, 17. 
South  Dakota,  cheap  charters 

in,  52. 

Spain,  state  monopolies  of,  8. 
Standard  Oil  Company,  disso- 
lution of,  155. 

influence  of  tariff  upon,  108. 
methods  of,  157,  173. 
proceedings  against,  in  Ohio, 

128. 
success   of   competitors  of, 

106. 

State,  activities  of,  7-9. 
dependence  of  commerce  and 

labor  upon,  12. 
origin  of,  5,  6. 
State  control  of  corporations, 

inadequacy  of,  63. 
State  socialism,  111. 
Stock  subscriptions,  necessity 

for  control  of,  138-140. 
of  national  banks,  78. 
of  state  banks,  74. 
three  methods  of,  54. 


248 


INDEX 


Suffofk  Bank,  77. 
Supreme  Court  decisions,  basis 
of,  in  recent  cases,  155- 
157. 

results  of,  47,  172. 
in  Knight  case,  171. 
in     Northern     Securities 

case,  21. 
Syracuse,  8. 

TAFT,  President,  on  modifica- 
tion of  Sherman  Law, 
182. 

on  voluntary  federal  incor- 
poration, 152. 

special  message  of,  69,  152. 
Tennessee,  banking  laws  of, 

78. 

Texas,  65. 

Trading  companies,  28. 
Trans-Missouri  Freight  case, 
opinion  of  Justice  Peck- 
ham  on,  163. 
of  Judge  Riner,  168. 
dissenting,      of      Justice 

White,  169. 
Transportation,      competition 

in,  33. 

developments  of,  14,  15. 
monopoly  in,  32. 
three  periods  of  improved, 
32-34. 


Trusts,  declared  illegal,  2L 
recent     decisions     against, 

155. 
Turkey,  state  monopolies  of, 

8. 

trading  company,  9. 
Tyre,  associations  of,  16. 

UNIFORMITY  OF  STATE  LAWS, 
149. 

United  States  Steel  Corpora- 
tion, 25,  105. 
business  controlled  by,  106. 

Utah,  provisions  for  stock  is- 
sue in,  56. 

VERA  CRUZ,  15. 
Vienna,  porcelain  manufactur- 
ers of,  8. 

WAITE,  Chief  Justice,  decision 
of,  101. 

"Wealth  of  Nations,"  13. 

Wealth  of  the  United  States 
in  1910,  99. 

West  Shore  R.R.  Co.,  34. 

White,  Chief  Justice,  opinion 
of,  160,  167-169. 

"Wild  cat"  banks,  76. 

Wilhelm  Tell,  24. 

Workman,  influence  of  com- 
bination on,  115,  116. 


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